Integrity risks
Introduction
3.1
This chapter considers whether the integrity arrangements of the Australian
Securities and Investments Commission (ASIC) are sufficient to meet current and
future challenges. The chapter discusses the following issues:
-
conflicts of interest that arise in the financial services
sector;
-
the adequacy of ASIC's integrity and anti-corruption
arrangements; and
-
specific integrity risks for ASIC employees.
Background
3.2
Conflict of interest is a term widely used in the financial services
sector. The Organisation for Economic Co-operation and Development (OECD) defines
a conflict of interest as occurring when 'an individual or a corporation
(either private or governmental) is in a position to exploit their own
professional or official capacity in some way for personal or corporate
benefit'.[1]
3.3
The Productivity Commission noted the impact of conflicts of interest on
competition in the financial services sector, stating that:
...commission-based remuneration structures create conflicts
that may limit competition and mean that at times the money flow is at odds
with acting in a consumer's best interest. These conflicts are particularly
apparent where banks, as the creators of a financial product, are integrated
with other entities that market, sell or advise on these same products.[2]
3.4
For many in the community, the scandals revealed by the Royal Commission
into Misconduct in the Banking, Superannuation and Financial Services Industry
(Royal Commission) appear to epitomise the conflicts of interest by individuals
and corporations in positions of trust which have exploited customers for
personal and/or corporate gain.
3.5
The Royal Commission's interim report noted that:
All the conduct identified and criticised in this report was
conduct that provided a financial benefit to the individuals and entities
concerned.[3]
But almost every piece of conduct identified and criticised
in this report can be connected directly to the relevant actor gaining some
monetary benefit from engaging in the conduct. And every piece of conduct that
has been contrary to law is a case where the existing governance structures and
practices of the entity and its risk management practices have not prevented
that unlawful conduct.[4]
3.6
The World Bank considers that when a position of trust is abused and
conflicts of interest are taken advantage of for private or corporate gain,
these actions are corruption.[5]
While conflicts of interest do not always lead to corruption, corruption almost
always requires a conflict of interest:
When it comes to corruption, there is almost always a common
denominator: a conflict of interest. A conflict of interest exists when an
individual or corporation has the opportunity – real or perceived – to exploit
their position for personal or corporate benefit. Corruption occurs when the
individual or corporation takes advantage of that opportunity and indeed abuses
their position for private gain.[6]
3.7
Regulatory agencies play a key role in ensuring integrity and public
trust in government, but their location at the intersection of money and
government power makes them particularly vulnerable to corruption.[7]
3.8
Victoria's Independent Broad-based Anti-corruption Commission (IBAC)
noted that conflict of interest is a particular risk with regulatory
authorities where employees work collaboratively with the industries they
regulate, and because some regulatory bodies receive revenue from the
industries they regulate. IBAC has summarised four factors that are drivers of
corruption risks in regulatory authorities as follows:
Lack of transparency
IBAC found that reporting of regulatory outcomes varied
across regulators, particularly the breadth of information being reported back
to the regulated entities. The report notes that by providing transparency
through public reporting, regulators can help assure the community that they
are operating with integrity.
Industry and regulatory capture
With an increased reliance on private industry to deliver
what were once public services, there is potential for conflicted relationships.
This can lead to 'regulatory capture', where regulators and their employees
potentially align their values and actions with that of the industry they are
regulating – rather than with the values and legislated purpose of the
regulator.
Integrity history of employees
Regulators often require specialised skills and experience to
perform work such as inspections and enforcement. It can be difficult to
recruit and retain the best employees for these positions as these skills may
also be in high demand in the private sector. Such competition could mean that
employees with problematic histories of misconduct or corrupt conduct in other
agencies are considered for employment in public bodies because they hold the
requisite skills.
Targeting by organised crime groups
Many employees of regulatory authorities have high levels of
access to sensitive personal and business information, sometimes with low
levels of accountability. The cultivation of these employees is an attractive
way for organised crime groups to facilitate their criminal activities.[8]
3.9
Managing conflicts of interest and identifying and addressing corruption
is central to building and maintaining integrity. The Western Australia
Integrity Coordinating Group defines integrity as:
...earning and sustaining public trust by serving the public
interest; using powers responsibly; acting with honesty and transparency; and
preventing and addressing improper conduct.[9]
3.10
In the past, Australia has had a strong reputation for integrity and
anti-corruption institutions. However, evidence suggests that Australia's
standards on integrity and anti-corruption may be falling. Australia is now
ranked 13th among OECD countries and its corruption perception index
has fallen steadily from 85 in 2012 to 77 in 2017.[10]
3.11
The Australian Commission for Law Enforcement Integrity (ACLEI) considers
that the starting point of anti-corruption system design is to consider how
corruption occurs and who benefits. It has identified the following corruption
prevention myths:
-
Bad apples: Thinking that corruption is always the domain
of a 'bad apple' or rogue employee—a corrupt individual acting alone—can draw
attention away from considering organisational vulnerability and integrity
systems as a whole.
-
It's all about the money: Assuming that vulnerability to
corruption is always driven by financial gain can mean missing possible
indicators. Personal benefit might take other forms, such as social reward,
ideological satisfaction, or excitement.
-
Training will fix it all: Formal training and education is
often the first solution offered when issues become apparent—because it's
measurable and quickly implementable. However, organisations should appreciate
the influence that informal situations have on establishing a desired culture.
-
The slippery slope: Believing that the 'slippery slope' to
corruption is inevitable because of making one mistake or poor decision can be
self‑perpetuating. Early intervention is possible, if organisational
integrity systems are strong, fair and employees have trust in them.
-
Only frontline staff are at risk: Non-operational staff
may be as vulnerable, and less prepared to respond, to improper approaches.
Many have similar or higher levels of access to sensitive information and
systems as their operational colleagues do.[11]
ASIC's integrity and anti-corruption arrangements
3.12
ASIC informed the committee that it manages internal and external fraud
risks under its Fraud Control Plan and Fraud Control Policy. The Fraud Control
Plan includes a summary of identified internal and external fraud risks
associated with ASIC's activities and functions, and sets out ASIC's approach
to managing fraud risk through the risk management framework which is based on
nine elements of the Commonwealth Risk Management Policy.[12]
3.13
Professor A J Brown argued that ASIC suffers from the same problem as
most other Commonwealth agencies in lacking sufficient independent oversight,
support and assurance to ensure the adequacy and performance of its internal
integrity and anti-corruption systems, due to the general weaknesses of the
Commonwealth integrity system. Professor Brown noted that:
In particular, the combination of the APS Code of Conduct
regime and AFP-oversighted corruption investigations are not up to standard as
a system for ensuring that integrity risks and issues are handled consistently
and appropriately in agencies, nor for providing independent oversight or
ensuring that high-risk misconduct cases are independently investigated rather
than simply dealt with 'in house', where necessary.
As one of the 7 agencies that are members of the AFP-led
Fraud & Anti‑Corruption Centre but not subject to the jurisdiction of
ACLEI, ASIC is one of the agencies [where] these gaps are particularly evident.[13]
3.14
The ASIC Capability Review recommended that ASIC should no longer be
required to employ staff under the Public Service Act 1999. This is
consistent with the earlier findings of the Financial Systems Inquiry. The
Treasury Laws Amendment (Enhancing ASIC's Capabilities) Bill 2018 which was
passed on 17 September 2018 will give effect to the above recommendation. The
change is intended to support ASIC to more effectively recruit and retain staff
in positions requiring specialist skills. It will bring ASIC into line
with other financial regulators (the Australian Prudential Regulation Authority
and the Reserve Bank of Australia).[14]
3.15
ASIC staff will be employed on behalf of ASIC and not on behalf of the
Commonwealth. ASIC staff will be subject to an ASIC Code of Conduct and ASIC
Values, to be determined by the ASIC Chairperson. ASIC staff under the ASIC Act
will not be subject to the Australian Public Service Values and Code of
Conduct. The ASIC Chairperson is required to uphold and promote the ASIC
Values. The Chairperson of ASIC is also required to take reasonable steps
to minimise conflicts of interest by having adequate disclosure of interest
requirements that apply to all staff employed by ASIC.[15]
3.16
While the above approach retains a set of values and code of conduct
under an employment contract, it lacks the oversight by a statutory external
agency and as a result, weakens ASIC integrity and anti-corruption measures.[16]
A separate question remains as to whether a set of values and a code of conduct
provide sufficient integrity and anti-corruption arrangements. On this point,
Commissioner John Price indicated that:
...the existing arrangement we've had around contractual
arrangements and staff needing to maintain appropriate professional standards
have been most effective indeed, and I'm not sure that any change of
legislation through moving out of the Public Service will alter that in any
way.[17]
3.17
ASIC advised it had not undertaken a comparison of its integrity and
anti‑corruption arrangements with the arrangements for peer regulators in
the United States, Canada, United Kingdom (UK), Singapore, Hong Kong and Japan.
ASIC argued that such a comparison would cause an unreasonable and significant
diversion of ASIC's regulatory and legal resources.[18]
Such a comparison could be facilitated through ASIC's participation in the
International Organisation of Securities Commissions (IOSCO). ASIC is on the
board and the former ASIC Chairman Mr Greg Medcraft was Chairman of IOSCO
for several years, starting from March 2013.[19]
3.18
The committee sought Treasury's view on the adequacy of ASIC's current
integrity and anti-corruption arrangements. Initially, Treasury responded by
stating that:
Treasury considers that ASIC is best placed to answer
questions about the precise nature and range of the integrity and
anti-corruption arrangements that apply to it.[20]
3.19
The committee informed Treasury that it considered it not best practice
for agencies to be responsible for determining whether or not their own
governance arrangements are adequate and, in particular, whether their own integrity
and anti‑corruption arrangements are adequate. The committee requested
Treasury to reconsider its answer. In its second response, Treasury stated
that:
Treasury refers to the information ASIC has provided on its
internal and external governance frameworks in its response to the
Parliamentary Joint Committee Secretary's letter of 1 August. Treasury notes
that those frameworks are similar to those that govern other independent
regulators such as the Australian Prudential Regulation Authority and the
Australian Competition and Consumer Commission.[21]
3.20
The Commonwealth Ombudsman is able to investigate complaints from people
who believe they have been treated unfairly or unreasonably. From 2016–17 to
2017–18, the Commonwealth Ombudsman received 352 complaints of which 20 were
investigated. The Commonwealth Ombudsman receives less than one complaint per
year about ASIC's Professional Standards Unit. The Commonwealth Ombudsman noted
that, while it does not review the adequacy of ASIC's integrity arrangements,
the complaints data do not indicate any inadequacy.[22]
3.21
The Commonwealth Ombudsman had conducted one own-motion investigation
into an alleged conflict of interest regarding the granting of regulatory
relief. The Ombudsman concluded that there was no evidence to suggest that
ASIC's decision to grant regulatory relief was contaminated by conflict of
interests. However, the Ombudsman did make three recommendations regarding
ASIC's management of the disclosure of a possible conflict of interests and its
efforts to address issues raised by the disclosure.[23]
3.22
ASIC has previously identified how corruption risks arise from its role
as a regulator. These risks fall into three areas:
- Potential corruptors may stand to make a financial profit, or otherwise
enhance their commercial interests, by obtaining access to the information and
intelligence that ASIC collects as a result of ASIC's regulatory functions.
-
Alternatively, potential corruptors may seek to benefit from favourable
treatment such as the imposition of lower penalties, improper determinations of
relief applications, or other biased decisions.
-
ASIC staff may seek to gain a profit or benefit for themselves or
others...may use ASIC powers and discretions for an improper purpose, and may
protect unlawful activity by diverting attention or otherwise manipulating
surveillance and investigations.[24]
3.23
The rest of this chapter seeks to explore the integrity risks arising
from favourable treatment (regulatory capture) and where staff seek to gain a
benefit for themselves or others.
Regulatory capture risks
3.24
Regulatory capture refers to instances where regulators are excessively
influenced or effectively controlled by the industry they are supposed to be
regulating. There are three areas in which particular risks arise for
regulatory capture:
-
staff moving between industry and regulatory jobs;
-
secondments; and
-
where regulatory staff are embedded in private sector
organisations (that is, required to conduct their work within the workplace of
industry participants, away from their home base at the regulator).
3.25
While all three types of staff movement bring certain advantages, there
are also attendant risks for regulatory capture and corruption. Mr Shipton,
Chairman of ASIC, acknowledged this at a recent hearing:
Regulatory capture is a big issue for us. We have studied
very closely some very interesting and important examples of regulatory capture
out of the United States. We've actually already had training for our
supervisory teams on regulatory capture. We will be having very frequent checks
in with them and disclosures and training with the supervisory team about how
to watch out for regulatory capture.[25]
ASIC secondments
3.26
ASIC uses secondments to and from industry to:
-
fill temporary vacancies and provide opportunities for staff to
increase their knowledge and skills;
-
develop a multi-skilled workforce;
-
strengthen relationships with key regulators and the private
sector;
-
deepen ASIC's regulatory expertise;
-
retain and develop ASIC's high potential talent; or
-
develop leaders with a diverse perspective.[26]
3.27
Private sector secondments are also facilitated through section 122 of
the ASIC Act. This does not alter the existing employment relationship and
means that the home organisation will continue to pay the secondee. Partial or
full payment may be recovered from the host agency by invoice.[27]
Senior Executive Leaders must approve all private sector secondments.[28]
3.28
ASIC's secondment policy recognises that conflicts of interests or
compromised security may be risks, particularly with private sector
organisations that ASIC regulates. The policy notes that these risks can be
mitigated by:
-
ensuring mandatory security clearances are completed and approved
before the secondment commences;
-
designing secondment positions to offer meaningful work without
exposure to potential conflicts; and
-
liaising with external secondment partners and risk and security
services in advance and during the secondment to ensure any potential conflicts
are considered and addressed by the Chief Legal Office. This includes any agency-specific
legislation security protocols and mandatory training requirements.[29]
3.29
The potential risks arising from secondments were highlighted when the
Senate Economics References Committee recommended that the Commonwealth
Ombudsman consider undertaking an own motion investigation into an allegation
of a conflict of interest for a secondee from a financial services firm in
relation to ASIC's decision to grant regulatory relief in 2005. The Ombudsman
found that there was no evidence to suggest that ASIC's decision to grant
relief was contaminated by conflict of interest or other undue influence.[30]
3.30
However, the Ombudsman noted that:
-
ASIC did not comply with its own internal policies for dealing
with conflicts of interest; and
-
the final report of ASIC's internal investigation into the
allegations could not be produced, making it difficult to assess whether the
investigation was appropriate in all the circumstances.[31]
3.31
The Ombudsman went on to make the following observations:
The Ombudsman acknowledges that secondment arrangements can
be highly beneficial. Secondments involving private sector organisations have
the potential to improve a regulator's knowledge and understanding of the
operating environment of the entities it regulates.
However, it is critical that public sector agencies, and
regulators in particular, appropriately identify and manage the possible
conflicts of interest that are inherent in secondment arrangements. The
processes for doing so should be robust and transparent in order to maintain
public confidence in the integrity of agencies' internal processes and decision
making.[32]
3.32
In 2014, ASIC informed the committee that in the previous five years
there had been 41 secondments of ASIC staff to industry, with 90 per cent of
those being SES or executive staff. In the same period, 14 staff had been
seconded from industry to ASIC, all at the executive level.[33]
ASIC staff embedded in banks
3.33
In August 2017, ASIC announced that its supervisory staff will be
embedded with banks to monitor governance and compliance with laws. The purpose
is to detect, respond to and remediate any failures in systems, procedures or
decision-making processes inside financial institutions that could lead to, or
are leading to, unacceptable outcomes for the consumers of financial services.
ASIC also noted that:
We want to increase the probability that the average person
inside financial institutions will come across and spend time with a
supervisory officer. We believe that that will change the mindset in
thinking, decision-making and their application to the daily work.[34]
3.34
That said, embedded staff face increased risks of regulatory capture and
corruption because of their proximity to those they regulate. ASIC informed the
committee that it was aware of the risks and was taking precautions, including
rotation between banks, limiting the amount of time away from ASIC, and
ensuring the deployed staff are sufficiently senior. In addition, staff are
also undergoing training, including examining case studies, to prevent regulatory
capture in Australia.[35]
Other integrity risks
Real-time surveillance of markets
3.35
In 2013, ASIC assumed responsibility for supervision of real-time
trading on Australia's domestic licensed equities and future markets. Since
that time, the nature of the markets has changed dramatically and the scope of
ASIC's supervisory responsibilities has increased. ASIC supervises 125 market
participants, trading across seven equities and futures markets, on which the
securities of more than 2000 listed entities are traded. More than 960 000
trades are made per day, compared with 520 000 in 2010.[36]
Those seven markets are a subset of over 50 markets now operating in Australia.[37]
3.36
ASIC implemented its Market Analysis and Intelligence (MAI) system in
2013 to provide sophisticated data analytics and identify suspicious trading in
real time and across markets, as well as greater levels of detection of insider
trading. MAI is built around algorithmic trading technology, and gives
ASIC the ability to analyse trade data for patterns and relationships. The new
system was designed, built and hosted by First Derivatives, and is based on technology
used in financial markets for market data capture, alerts and analytics and
high frequency and algorithmic trading.[38]
3.37
While the MAI system can provide substantial benefits to identifying
suspicious activity, it also comes with some attendant integrity risks. In
particular, the capacity of staff to discount or ignore information can
allow others to benefit. Training and active supervisory monitoring are
required to reduce the potential for such situations from arising.
ASIC staff trading
3.38
It is very important that any trading or participation in financial
services by ASIC employees is legal and perceived by the public to be fair. Where
ASIC staff engage in trading in shares and derivatives and participate in
financial services in other ways, there is the potential for conflicts of
interest to occur.
3.39
ASIC's Commissioners are subject to a Statement of Obligations, which
includes a requirement to make the following disclosures to the Minister in
writing:
-
any direct or indirect pecuniary interest they have in a business
in Australia, or any body corporate carrying on a business in Australia;
-
any direct or indirect pecuniary interest in financial products
or other interests regulated by ASIC; and
-
any agreement, understanding or expectation that they will resume
a previous business relationship or enter into a new business relationship when
they cease to be a Commissioner and any related severance arrangement or
ongoing financial arrangement (ASIC Act, s. 123).[39]
3.40
That said, the Public Governance, Performance and Accountability Act
2013 (PGPA Act) also places the following obligations on ASIC
Commissioners:
-
exercise due care and diligence (s. 25);
-
act honestly, in good faith and for a proper purpose (s. 26);
-
not improperly use their position to gain an advantage for
themselves or others or to cause detriment to ASIC or anyone else (s. 27);
-
not improperly use information (s. 28); and
-
disclose details of their material personal interests (s. 29).
3.41
The Statement of Obligations provides that Commission members, like all
ASIC staff, must obtain approval before they or their connected persons trade
in financial products (as defined in ASIC's Staff Trading Policy) or
pre-register for an Initial Product Offering.[40]
3.42
The UK Financial Conduct Authority's published code of conduct includes
a section on staff trading that requires staff to seek clearance in advance of
carrying out any trades in relevant organisations (including contacting
brokers) and must complete the trades in two working days. Approval is not
normally given to dispose of investments held for less than six months to avoid
any perception of an abuse of information. Employees are prohibited from
trading in contracts for difference, spread betting, wagering contracts, and
fixed odd bets on UK companies and UK markets. Investing in a fund of contracts
for difference is permitted.[41]
3.43
The US Securities and Exchange Commission standards of ethical conduct
also address employee share trading and include the following provisions:
-
members and employees are prohibited from purchasing or selling
any security while in possession of material non-public information regarding
that security;
-
members and employees are prohibited from recommending or
suggesting to any person the purchase or sale of security; and
-
members and employees are prohibited from a wide range of trading
activities.[42]
ASIC's surveillance of the dark web
3.44
The 'dark web' refers to the portion of the internet that can only be
accessed with additional networking protocols and software. Within the dark
web, marketplaces exist which enable criminals to anonymously buy, sell and
exchange goods and services, including malicious software and illegal
substances. The dark web can also provide access to sensitive networks, payment
card data, bank account information, brokerage account information and hacking
services. Some of these activities occur within closed internet forums which
require both sellers and purchasers to have demonstrated trust or reputation
with forum administrators and users before being provided with access.[43]
3.45
As the use of the dark web continues to grow, dark web marketplaces may
be used to facilitate financial crime. The dark web presents challenges for law
enforcement as it is difficult to directly access.[44]
3.46
ASIC has indicated that there are difficulties in developing
surveillance capabilities to monitor the dark web, including:
-
the ability to assume identities in order to 'gain trust' to
access closed dark web forums;
-
the protection of its systems and information from the dark web;
-
the obscuring of internet protocol addresses to use the web
anonymously;
-
the immediate jurisdictional access to 'threat actors' who are
largely operating outside Australia; and
-
lack of technological software and tools that have a specific
focus on financial crimes, as typically the focus is on narcotics and
terrorism.[45]
Other issues with implications for
ASIC's integrity
3.47
In addition to the issues already considered in this chapter, there are
a number of other issues which have arisen since previous inquiries considered
ASIC's integrity and anti-corruption arrangements:
-
ASIC's increasing role as a law enforcement agency;[46]
-
ASIC's proposal that it be prescribed as a law enforcement agency
in the Crimes Regulations 1990 for the purposes of Part IAC of the Crimes
Act 1914 (Crimes Act) on assumed identities;[47]
-
ASIC's indication that it would support law reform to:
-
harmonise and enhance ASIC's search warrant powers with those in the
Crimes Act (for example, to allow ASIC to operate or secure electronic
devices);
-
provide ASIC with access to telecommunications intercept material
to investigate and prosecute serious offences; and
-
allow ASIC to obtain and share telecommunications data with its
foreign counterparts which will help with, for example, the investigation of
dark web activity facilitated by actors located overseas;[48]
-
ASIC's participation in joint taskforces and operations with
other law enforcement agencies;
- ASIC's industry funding model;[49]
-
the proposal to grant ASIC broader competition powers;[50]
-
the recommendation by the Productivity Commission that all banks
should appoint a Principal Integrity Officer obliged by law to report directly
to their board on the alignment of any payments made by the institution with
the new customer best interest duty;[51]
-
the scale of corporate crime which is estimated to cost Australia
more than $8.5 billion a year and account for approximately 40 per cent of the
total cost of crime in Australia.[52]
This figure is likely to increase following the revelations of the Royal
Commission;
-
the legislative proposal for ASIC's expanded role in relation to
whistleblowing in the private sector, including the ability to make class
orders to exempt companies from the requirement to have a whistle-blower policy;[53]
and
-
the extent to which ASIC would benefit from ACLEI's proactive
educational role on anti-corruption measures.
Committee view
3.48
The committee considers previous inquiries into ASIC's integrity and
anti‑corruption risks did not have access to evidence on:
-
the revelations of the Royal Commission and the extent of the
crime occurring in the financial services section;
-
the extent to which the definition of serious and organised crime
law enforcement agencies does not accord with the community standards and
legislated definitions by the Parliament;
-
the pervasive nature of conflicts of interest in the financial
services sector that turn into corrupt events when positions of trust are
abused;
-
regulatory capture risks arising from ASIC's secondments, flow of
staff between ASIC and industry, and ASIC's new plan to embed its staff in industry;
-
corruption risks arising from the involvement of ASIC staff in
trading;
-
corruption risks arising from ASIC's real-time surveillance; and
-
corruption risks arising from ASIC's surveillance of the dark
web.
Regulatory capture
3.49
The committee considers that regulatory capture is a significant issue
faced by Australian regulators generally, given the size and power of
corporations that operate in Australia. ASIC faces particular risks due to the
financial benefits to be gained by participants in the financial services
sector and the close interaction of ASIC staff and the industry it regulates.
The committee notes that ASIC has been criticised for being a timid regulator[54]
and is concerned that such timidity could be a result of regulatory capture.
3.50
While the committee has not sought to examine in detail the nature and
extent of regulatory capture, the perception that regulatory capture has
occurred:
-
weakens ASIC's ability to perform its role;
-
increases ASIC's vulnerability to corruption risks; and
-
deprives ASIC of vital information from consumers and industry
participants that lose trust in ASIC and no longer report misconduct.
3.51
The committee notes that regulatory capture is a significant integrity
issue which affects ASIC and this has been supported by the findings of the
Royal Commission. This, together with the public perception of ASIC as a timid
regulator, adds significant emphasis to the need for ASIC's integrity and
anti-corruption arrangements to be strengthened.
Other integrity risks
3.52
The committee observes that ASIC officers working on the real-time
surveillance system are exposed to two very significant corruption risks.
Industry participants may seek to corrupt them to not notice or report certain
events, or to leak insider information.
3.53
The committee notes that integrity and corruption risks arising from
ASIC staff participating in trading were not considered by the Parliamentary Joint
Committee on the ACLEI inquiry or the Senate Select Committee on a National
Integrity Commission. ASIC staff being involved in trading presents an inherent
conflict of interests. As noted earlier in this chapter, where conflicts of
interest are acted on, they potentially become corrupt acts.
3.54
The committee considers that it is vital for ASIC staff to be beyond
reproach and to be perceived to be so. The committee is not convinced that the
measures that are currently in place are sufficient to guarantee that ASIC
staff are perceived, by those they regulate and the public, to be free from
conflicts of interest. In particular, the committee is not convinced that the
existing share trading governance process in ASIC would be able to identify all
instances where ASIC staff (particularly those involved in market monitoring
and information technology) have access to inside information which could be
used to benefit from trades.
3.55
The committee considers that the corruption risks arising from ASIC
staff continuing to be involved in trading adds further weight to arguments to
enhance ASIC's integrity and anti-corruption arrangements. Consequently, the
committee believes that further consideration should be given to whether ASIC staff
should be allowed to engage in trading at all.
3.56
The committee notes that ASIC is proposing reforms to allow it to
address the challenges presented by the dark web. Some of these reforms, such
as the ability to assume identities, would represent significant additional
powers that warrant appropriate oversight. In addition, working undercover and
gaining the trust of dark web forums would expose ASIC officers undertaking
those roles to significantly greater corruption risks than has previously been
the case.
3.57
The committee considers that, if such reforms are progressed, they would
add significant weight to the case for ASIC to be placed under a suitable
external integrity regime.
Conclusion
3.58
The committee notes that ASIC has embarked on a review of its conflicts
of interest process and approach. During the next parliament, the committee
will be interested in hearing from ASIC on the outcomes of this review and the steps
that ASIC is taking to address conflicts of interest and associated integrity
risks.
3.59
The committee is concerned that ASIC's responses to questions about
integrity and anti-corruption arrangements are focussed on fraud and do not
reflect a sufficiently broad and sophisticated understanding of the types of
issues identified by the Victorian IBAC and the specific risks identified in
this chapter. The committee is also concerned that the Treasury, as the
portfolio agency responsible for ASIC, was not able to effectively respond to
questions on the adequacy of ASIC's integrity and anti-corruption arrangements.
3.60
It is essential for ASIC to be perceived as being beyond reproach, and
to be driven by an unconditional commitment to upholding the law without
conflicts of interest that could lead to corruption.
3.61
Subject to the findings of the Royal Commission, the committee considers
there is merit in an independent external risk assessment of ASIC's integrity
and anti‑corruption arrangements to be undertaken by an integrity and
anti-corruption expert with reference to:
-
the integrity of ASIC's performance of all its functions,
particularly in the broader sense of observing proper practice;
-
risks associated with regulatory capture;
-
whether ASIC's decisions on whether to pursue litigation or
negotiated settlements are completely unencumbered from the influence of those
it regulates; and
-
whether closer scrutiny of ASIC's integrity and anti-corruption
arrangements would improve ASIC's performance as a regulator.
3.62
The committee also considers there is merit in ASIC working with IOSCO
to conduct a comparative analysis of integrity and anti-corruption measures
being undertaken in similar jurisdictions.
Recommendation 2
3.63
The committee recommends that ASIC work with the International
Organisation of Securities Commissions to conduct a comparative analysis of
integrity and anti-corruption measures being undertaken in similar
jurisdictions.
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