“Straw directors”? no kidding!

The federal government is putting through laws that would give directors of companies greater latitude to incur debts that cannot be paid, with a view to assisting the process of restructuring their financially struggling company.  This “safe harbour” reform has been on the directors’ agenda for some years.  There are legitimate reasons for it, qualified by the following background.

It was in 2012 that a senior academic, frustrated that her warning message was not getting through, that no identity checks were required of a director when setting up a company, resorted to a popular analogy in pointing out that a person needed to show more proof of identity to book a movie online than to register a company.   Hence, Leahcim Yarrum could set up as many companies as he likes, and incur debts, even though he does not exist. Even innocently, a director might use varieties of his name – Mike, Michael, Mick – with various addresses, resulting in his corporate history, good or bad, being difficult to find.  

Following that, there have now been at least four government recommendations for this simple idea – a director identity number (DIN) to be implemented – allowing for the convenience offered by a frequent flyer card.

(It might be noted that this idea did not spring from the director community, but from academia concerned about unlawful corporate and phoenix misconduct. In fact the director community was strangely quiet throughout.)

One body supporting the idea was the Productivity Commission, in its 2015 report.  The government has responded, in 2017, to the Commission’s recommendation, lukewarmly saying that it

“will give this (DIN) proposal further consideration as part of its ongoing work on insolvency reforms”. 

While the fictitious director might be discovered when the company enters insolvency, long down the track, the need for identity exists far earlier and wider in scope than that, including when the real damage is being done – tax moneys are not be paid, assets are being transferred, insolvent trading rolls on, and employees are losing out.

Director identity is relevant to the important need for corporate transparency, supported by free access to corporate (ASIC) databases, to the regulation of money laundering and counter-terrorism financing, and to current inquiries into the black economy, the misuse of employment entitlements and unpaid superannuation, the construction industry and of course tax avoidance. 

Did we read of “straw directors” being recently involved in a $165 million tax fraud? 

To sum up

The laws proposing a safe harbour for directors, seeking to control the black economy, prosecuting money laundering, and preventing the misuse of employee entitlements, and unpaid super might all be better directed if director identity were first required and implemented. It would not be a total answer, but it is a rather important and obvious requirement to expect. 

There is more that could be said about other reforms – beneficial ownership of companies, single touch payroll, non-investigated corporate failures – but focusing on the need for a DIN is enough for now.


DIN recommendations

These have come from Professor Helen Anderson, and colleagues, with their 40 and more reports, books and submissions at this link; the Financial System Inquiry Report 2014; the Senate report on insolvency in the Australian construction industry 2015; and the first Senate report on corporate tax avoidance 2016. And the black economy inquiry 2017 and the AML/CTR report 2016 are replete with examples of problems of identity. New Zealand is also contemplating a DIN.  India has had one since 2006.

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