Little Risk! High Pay!

Government Gives Con Men Key to Auckland

The first and worst of all frauds is to cheat one's self. All sin is easy after that.

- Pearl Bailey

Auckland's criminals needn't risk robbing banks or petrol stations anymore. Fraud pays more and there's little risk of being prosecuted.

The Queen City's understaffed police force won't prosecute fraudsters - not unless they are presented with a water-tight case prepared at the expense of some private citizen or private sector company. Rather than prosecute, the corporate cops are reportedly giving notorious conmen the message: "We're on to you, clean up your act or we'll lock you up." Such warnings are dismissed as a symptom of this government's unwillingness to give the police the manpower to enforce the law. The Auckland region is at least 200 police short. The Independent understands the Auckland Fraud Squad has about 1,000 files on conmen it cannot investigate due to staff shortages.

Instead it's user pays. Pay your taxes and then pay a private eye and/or insolvency specialist to do the job your taxes were supposed to pay the cops to do. Private eyes and insolvency specialists can't keep up. They are spending creditors' dollars on high-powered lawyers to pressure the government to do its job and enforce the law - to little avail.

One private eye told The Independent about the insurance cheat he'd caught red handed with the expensive stereo system from the car he claimed had been gutted in a fire. He went to the police station with the crook, the evidence and a signed confession only to be told to go away and come back later after he'd made an appointment.

Private investigators say a major part of their business now comes from analysing and investigating theft and fraud complaints from clients, then preparing the finished file to present to the police, who may or may not decide to make an arrest. In other words, the taxpayer is paying twice.

An Auckland insolvency specialist said in addition to a private investigator, he had hired a high-profile Wellington public law firm to put together a case against notorious commercial hazard, suspected of large-scale GST fraud. The complaint, involving millions of dollars, was made several years ago but so far the IRD has declined to act. Nor do the police appear interested.

Insurance council chief executive Chris Ryan told The Independent fraudsters were walking away from their crimes because police did not have the resources to act on strong leads provided by industry investigators. In some cases, this information was not even being channelled through frontline staff, he said.

It appears if you make a fraud complaint to the police, you must also present them with a ready-made prosecution. That's providing you get past the first fob-off - that your complaint is a civil, rather than a criminal matter. This regularly happens, say private investigators and insolvency specialists, even when the complaint falls within the Crimes Act's fraud provisions.

Auckland Fraud Squad head, Detective Senior Sergeant Andy Lovelock, said while his unit's policy had not changed since he became its head in June 1999, "in the current climate" the police would need to be sure a breach of the criminal law had occurred before investigating a complaint. Asked by The Independent whether this meant a complainant had to effectively investigate his own complaint, Lovelock said: "The circumstances need to be compelling that there has been a breach of the criminal law."

Unless a complainant could demonstrate this, plus identify the person believed to be responsible and provide analysis linking the offender with the crime, it was "less than likely" that the police would begin an investigation. This adds up to user-pays vigilante behaviour - justice for those who can afford it. Lovelock said the police put a priority on violent crime. In these circumstances "I can quite happily live with fraud not being investigated."

Source: Auckland business weekly newspaper The Independent Wednesday 30 April 2003

I would suggest that someone who says, "I can quite happily live with fraud not being investigated," has probably not been defrauded of much. Of course I'd rather be cheated than killed! But must it come down to such a choice?

Maybe New Zealand measures low on the corruption scale if your corruption measurement only includes elected officials and bureaucrats. But if white-collar crime is as rampant as this article indicates, isn't it time for a solution? Unchecked crime costs everyone.

The day after I put this page up, I finally realized exactly what is wrong with Unit Trusts! It's because 5 unitholders could sue for a failed trust, bear all costs, and win - yet the proceeds would be split among ALL unitholders. I concluded this after reading the following:

Excerpt from a Discussion of Ronald Coase's Theorum

(for which he was just awarded the Nobel prize...)

It All Depends on Transaction Costs

Why is it ... that we still have pollution in Los Angeles? One possible answer is that the pollution is efficient - that the damage it does is less than the cost of preventing it. A more plausible answer is that much of the pollution is inefficient, but that the transactions necessary to eliminate it are prevented by prohibitively high transaction costs.

Suppose a steel mill has the right to pollute, but that doing so is inefficient - pollution control is cheaper than either putting up with the pollution or changing the use of the land downwind. Further suppose that there are 100 landowners downwind. With only one landowner, there would be no problem - he would offer to pay the mill for the cost of the pollution control equipment, plus a little extra to sweeten the deal. But 100 landowners face what economists call a public good problem. If 90 of them put up the money and 10 do not, the 10 get a free ride - no pollution and no cost for pollution control. Each landowner has an incentive to refuse to pay, figuring that his payment is unlikely to make the difference between success and failure in the attempt to bribe the steel mill to eliminate its pollution. If the attempt is going to fail even with him, then it makes no difference whether or not he contributes. If it is going to succeed even without him, then refusing to contribute gives him a free ride. Only if his contribution makes the difference does he gain by agreeing to contribute.

There are a variety of ways in which such problems may sometimes be solved, but none that can always be expected to work. The problem becomes harder the larger the number of people involved. With many millions of people living in southern California, it is hard to imagine any plausible way in which they could voluntarily raise the money to pay all pollutors to reduce their pollution.

This is one example of the sort of problem referred to under the general label of "transaction costs." Another would occur if we reversed the assumptions, making pollution the efficient outcome but giving the landowners the right to be pollution free. If there were one landowner the steel mill could buy from him the right to pollute. With 100, the mill must buy permission from all of them. Any one has an incentive to be a holdout - to refuse his permission in the hope of getting paid off with a large fraction of the money the mill will save from not having to control its pollution. If too many landowners try that approach the negotiations will break down, and the parties will never get to the efficient outcome.

Seen from this perspective, one way of stating it is that the problem is not really due to externalities at all, but to transaction costs. If there were externalities but no transaction costs there would be no problem, since the parties would always bargain to the efficient solution. When we observe externality problems (or other forms of market failure) in the real world, we should ask not merely where the problem comes from, but what the transaction costs are that prevent it from being bargained out of existence.

Source: daviddfriedman.com

The economic approach to crime assumes that criminals are rational (though it sometimes seems as if collective multiple victims are not) - someone turns to fraud because that is the most efficient way for him to make money. To prevent it, we must raise his costs or reduce his benefits. Collective victims are not an efficient way to do this when all will benefit even if only a few participate. Collective victims, it seems, must turn to the law.

How much money should be spent to enforce the law? If fraudsters are rational, you don't have to make fraud impossible in order to prevent it - just make it more difficult (this could be by raising the risks) so that fewer people engage in it. In controlling crime, the objective is to reduce costs for everyone.

One way would be to increase the punishment for those who are caught...

Source: Ideas of Gary Becker, David Friedman. See Friedman's website if you're interested in this kind of thing for some enriching ideas.