ASB's fraud-alert failure

ASB's revelation this week that one of its financial advisers had ripped off 22 of his (I'm assuming it's a male) clients to the tune of "several million dollars" confirms everyone's worst prejudices about the finance business.

Those close to the source of your money are always subject to the temptation to skim off just a little bit of it for their own purposes - go on, no-one will notice, I'll pay it back soon. Most of the time, however, honesty gets the better of people.

And when fraud does happen within financial advisory organisations it's not usually part of a cunning plot to strip clients of their life savings but the outcome of an individual's slide into personal difficulty.

I recall a research paper written a few years ago that delved into fraud in the Australian financial planning industry, which discovered that the majority of the, surprisingly few, advisers who committed fraud were merely trying to patch up holes in their own balance sheets rather than destroy their clients'.

I couldn't find a copy of the paper, co-authored by Tim Farrelly (a former Macquarie executive who now runs his asset allocation business), but I did track down this report by the Victorian government into the causes and possible preventatives of electronic fraud, which touched on Farrelly's study.

"The ways in which people can act dishonestly are only limited by one's imagination. History provides countless examples of people using ingenious means to steal property or to obtain benefits fraudulently. There are, however, numerous common motivational and personality factors that arise in crimes of deceit," the Victorian government report says.

The reported cited Farrelly's research that found "in approximately one-quarter of financial services frauds he had examined, financial advisers had sought to make good losses incurred through gambling".

The Victorian study also offered suggestions to help corporations, amongst others, identify ways to prevent fraud: "The Committee believes that one of the greatest deterrents to fraud within organisations is a commitment by upper-level management to the prevention of fraud, an understanding of how to achieve the goal of fraud prevention, a set of policies to this end, and communication with employees both directly and through modelling of a fraud prevention ethic."

Perhaps the higher echelons of the ASB were not familiar with the research. Interestingly, ASB investment advisers face stricter internal controls than most of the industry - the group prides itself on being ahead of the pack in getting ready for regulation.

For example, the former head of the ASB financial planning division, Jonathan Beale, told me in 2007 that the bank was putting its advisers through a university course - despite there being no legal requirement then for any formal education standards.

"Banks are taking the lead in the advice industry," Beale says. "We are moving to a more regulated environment and brand is very precious to the bank."

Those ASB clients who were defrauded would be very grateful for that brand-consciousness, with the bank making good on the losses incurred by its wayward adviser.

 


David Chaplin