ASIC’s database, the Productivity Commission and Phoenix misconduct

Three stars have aligned this August – the Productivity Commission’s inquiry into data usage, the government’s pending decision on how to make more money out of ASIC’s corporate data, and ASIC’s and the ATO’s media campaigns against unlawful phoenix activity – conveniently now prompting this focus on the various connections between them.

One reason the police or regulators might try to use the media to prevent or control unlawful conduct is that there are inherent difficulties in resourcing the gathering of evidence to prosecute or deter the perpetrators. There is often plenty of smoke but difficulty in finding the fire.

One context of the need for data – phoenix activity

That difficulty exists with phoenix activity, involving a legally broad range of misconduct, one existing more in concept than in clear law, even in terms of quantifying the harm done. Phoenix activity broadly involves breaches of duties by directors, which covers a wide spectrum of civil law misconduct, and can involve criminal conduct. Hence, evidence on phoenix misconduct can be difficult to identify and formulate in order to prove a breach of the law. And its perpetrators know enough not to leave any written or other record of their activities beyond the routine.  

But apart from individual cases of phoenix misconduct, and there are no doubt many, much valuable core data on the various elements of unlawful phoenix activity exists, that would be useful for regulatory and law reform focus. A government commitment on scoping that data, putting processes in place for its extraction, and further process for its analysis. Resourcing what might be termed legal and business infrastructure can repay many times over.  It bears some comparison with a Senate Economic References Committee recommendation in 2010 that there be a government unit established for such a task, with a focus on corporate and personal and corporate insolvency. That was not accepted, nor the single insolvency regulator of which that unit would be a part. Nevertheless, AFSA, as the personal insolvency regulator, has itself subsequently allocated resources to the capture of data.

Academic research offers the benefits of quality and independence. The idea of a verified director identity number – a DIN – came from Professor Helen Anderson of the Melbourne University Phoenix Team, whose work has produced very informative, and objective, reports on the regulation of unlawful phoenix activity.  The merits of a DIN, and its associated company director card – a CDC – are separately explained.

Productivity Commission Inquiry

The 21st century’s recognition of the economic importance of access to and usage of a country’s data is a reason for this inquiry.  It was recommended by the 2014 Financial System Inquiry Report of David Murray, based largely on grounds of the potential for major economic benefit to flow from better use of data. The Productivity Commission has a large number of submissions to consider and is due to issue an interim report in November, and a final report in 2017.

“Upgrading and operating the ASIC registry”

At the same time the government is the final phase of a tender process to “test the market” on the capacity of a private operator to upgrade and operate the ASIC registry, and to “develop and sell value added products and services”. Bids are due by 29 August 2016.

How the economic benefits of better use of data identified by the FRI Report will be reconciled with the government’s commercial intentions concerning the body of information in the ASIC database, and on-going, remains to be assessed after bids close.  The government will also need to reconcile its regulators’ concerns about phoenix activity, and its impact on tax revenue for one. Phoenix misconduct thrives in the darkness of limited corporate transparency. More open and free access to data would allow bright lights to shine on its operators.  

History sadly suggests that sometimes short term commercial gains will win over the financial and resource commitment that needs to be given to ensure long term infrastructure returns; but no doubt a careful and thoughtful decision will be made. 

Capturing data

The Productivity Commission may wish to consider some real life examples of the consequences of inattention to good data collection and retention. It was an issue in the FSI Inquiry, and has been the subject of comment in numerous insolvency inquiries in the past, going back to the 1988 Harmer Report. The difficulties remain.

The Melbourne Phoenix Team itself has encountered problems in trying to “capture reliable and reconcilable statistics on the cost, incidence, and enforcement of laws dealing with illegal phoenix activity”. While the Team reports that various government agencies publicly expressed serious concerns about phoenix activity, and committed significant resources to address it, those agencies in fact kept poor, inconsistent and unreliable data on the topic of their publicly expressed concern. 

The Phoenix Team was in fact obliged to trawl through ASIC media releases and other such soft data to ascertain what action had been taken in identifying and pursuing phoenix operators, no doubt sifting through reports of phoenix swoops and raids, but perhaps finding that whatever outcomes were achieved were separately reported by the prosecuting agency. Even in relation to major reforms to tax director penalty notices made in 2012, the Team found that ATO had no readily available longitudinal assessment of pre- and post-2012 tax recoveries or impacts under that new regime.

The Melbourne Team’s second Report concluded that inconsistencies and gaps in datasets relating to the incidence, cost, and enforcement of laws dealing with illegal phoenix activity rendered its accurate quantification “impossible”. This was despite other assessments and quantifications made on which a number of government agencies continue to rely.

But while accurate or even approximate quantification was not available, the Phoenix Team does report that “illegal phoenix activity is a significant problem that justifies the commitment of substantial government resources”.

The question might be, resources for whom and for what purposes.

Agencies’ obligations to work efficiently

Government decisions on increasing regulator funding should not be made without addressing what underlying improvements the regulator can make to its operations, including by way of allocating resources more productively. While it appears there is a significant level of intelligence held on phoenix operators gathered by agencies’ data matching processes, there is a need to establish a groundwork of gathering, maintaining, analysing and sharing of that information.

Such data necessarily assists in regulators being able to better focus their enforcement activities. It also assists the government in making policy decisions about the need for and the allocation of resources.

Funding decisions made without at least requiring that informative data be gathered and held often serves only to entrench or delay attention to inherent inefficiencies in an agency’s operations.

For all the importance put on the fight against illegal phoenixing, and the amount of tax revenue claimed to to have been lost, the data collection and analysis maintained by the phoenix regulators appears wanting.

In that respect it is instructive to see that the same types of difficulties in information access that were encountered by the Melbourne University Phoenix Team are also being encountered by others, as revealed in their submissions to the Productivity Commission.

One submission refers to government data contained in “agency silos”, with datasets frequently not comparable or shared across agencies. Nor are datasets developed with collateral benefits for broader analytical purposes beyond the particular agency’s needs, arising “from a lack of awareness and understanding of what others may already need or be doing”. Either that, or, it might be said, some perverse aversion to sharing that information.

Another submission refers to the limited benefits of industry surveys, as an alternate to quantitative data. But as the submitter said, while surveys are an alternate to hard data, they “are a poor source of information” and that while “the largest surveys conducted in Australia are sufficient for calculating basic statistics with confidence, they are well below the amount required for other important research questions”.

So while our regulators are out raiding premises to gather evidence against phoenix operators, a worthy exercise, one would like to think that they are also thinking of the bigger picture, and starting to keep better records of what they find, and what measures they use that work best.  This will inform them in their decisions about future raids.  While government agencies do not make government policy, they can and do influence it.

Just as the government and its agencies might advise any company director running a business to monitor the performance of the business, and keep good and accessible records, so too should government agencies. The Productivity Commission may come up with ideas on how this might be achieved.   

References to information in this commentary are available on request.

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