Increased penalties for drug offences did nothing to reduce the incidence of drug trafficking. Many drug offenders now receive longer prison terms than murderers. Yet illicit drugs are available on almost any street corner.
For the same reason, increasing penalties for financial crime will do nothing to improve the extent to which banks comply with the law.
The final report by the banking royal commission will be one of the legal and economic landmarks of the year. The royal commission will prove to be a profound social and policy failure if the key or even a major recommendation that stems from it is to pass laws that make it easier to lock up dishonest bankers. There are already ample state and federal laws imposing prison terms for dishonest or deceitful financial conduct. And they did nothing to curb shoddy bank practices.
It is understandable that many groups in the community want to see harsher laws applied to dishonest bankers. The royal commission has exposed thousands of instances of blatant, unmitigated unethical and illegal conduct by bankers, resulting in the financial ruin or crippling of individuals. This naturally engenders anger and the urge for retribution against bankers. The pitiable state of sentencing law in Australia shows us that this almost inevitably leads to the passing of laws that carry harsher penalties. Research, however, shows that this approach will almost certainly fail to deter further misconduct.
Common sense suggests that people make cost-benefit calculations before acting, and hence increasing penalties should result in less crime. Science, however, debunks the myth of general deterrence. The greatest deterrent to crime is not the size of any potential penalty; rather, it is the perception in people’s minds that if they do offend they are likely to be caught. Studies from the US show that not even the death penalty reduces crime.
It seems that the cost-benefit analysis that most people undertake when contemplating committing crime is a one-step — not a two-step — process. The most powerful consideration is whether they will be caught, not the size of the penalty if they are caught. It is for this reason that speed cameras are so effective at reducing speeding and people rarely commit crime in the vicinity of uniformed police or when they are aware they are being filmed.
And it is for this exact reason that many bankers have behaved so appallingly in recent years. The reality is that banks operated in a legal enforcement vacuum. They enjoyed effective legal immunity. There was no mechanism through which individuals could challenge inappropriate conduct by banks. It is almost impossible for an individual to seek redress through the courts against a bank. It is unthinkable to lodge a writ against a bank in the local court to obtain a remedy for fraudulent conduct. Banks are so rich that they would deep-pocket the process and either win by obfuscation or by drawing out proceedings until the complainant ran out of money.
It is untenable to go to the local police to complain about bank impropriety because the issue would be regarded as too complex, or a civil matter, or too minor to merit a police investigation. And, of course, the Australian Securities & Investments Commission does not do that sort of stuff. It seems it has been busy keeping busy with as yet unascertainable important activities.
Thus banks operate in what is effectively a non-legal world from the perspective of being faced with the prospect of legal consequences for their misconduct. The unavoidable reality is that this must lead to an increase in illegal behaviour. This is demonstrated by the Melbourne police strike of 1923, when mass rioting and looting by otherwise law-abiding people resulted in several deaths. Overnight there was an incalculable increase in the Melbourne crime rate, simply because people thought they would not be held accountable if they committed criminal acts.
This is the same environment of legal impunity banks have been operating in for several years. The cause behind inappropriate bank conduct on a large scale is not staff bonuses for higher sales, nor is it capitalism. These are both good things. In particular, it is desirable to offer staff incentives to work more effectively. It leads to enhanced staff and corporate prosperity. The main cause behind the shoddy behaviour by bankers is that they knew that they would not be held to account.
The solution to making bankers more compliant with their legal duties is to ensure they are aware the law applies even to them. This requires twin reforms. The first is the establishment of a financial services tribunal that can be accessed by all Australians — even poor ones — to undertake efficient investigations into complaints against banks. The stress must be on the speedy and enforceable resolution of all matters, so lawyers would be excluded from appearing at the tribunal, which would be given a maximum of 30 days to finalise complaints.
Second, ASIC must be given a statutory mandate to audit a minimum number of banking transactions annually, and should be compelled to prosecute all breaches of the criminal law where the evidence discloses a reasonable prospect of conviction.
Relatively minor offences should be dealt with by way of infringement notices, while more serious ones should be prosecuted through the courts.
Tough on crime feels good but acting on this impulse is the main reason Australia has a Third World sentencing system. In order for the royal commission to result in more than shaming senior bankers, this urge needs to be resisted. Instead, the government needs to implement measures that will result in a high number of selective and random audits of bank transactions while ensuring that bankers who do breach the criminal law are dealt with by proportionate sanctions — not penalties set artificially high to placate today’s baying mob.
Mirko Bagaric is Director of the Evidence-Based Sentencing and Criminal Justice Project at Swinburne University of Technology. This opinion piece was originally published in The Australian.