University of Western Australia
This article by Professor Elise Bant from the University of Western Australia and the University of Melbourne originally appeared on Pursuit, the University of Melbourne's research news website.
Catching corporate fraudsters has been a disheartening, and often unsuccessful, exercise in the Australian justice system.
This is because it has been impossible to prove corporate fraud unless we can pinpoint guilty individuals at the helm, or catch them with their hands in the till.
Last week, that restrictive approach changed. The High Court found that corporations think, and act, directly through their systems, policies and practices.
So, if a company had a predatory business model, it can be assumed that this was a knowing and deliberate strategy that can be penalised through the courts.
That decision is a portal to a brand-new world.
Its implications are huge, extending to virtually every aspect of corporate wrongdoing, including that occurring through the use of AI. The decision is bound to attract worldwide attention.
Productivity Partners Pty Ltd (trading as Captain Cook College) v ACCC was the latest in a series of cases brought by consumer regulator, the Australian Competition and Consumer Commission (ACCC), against dodgy Vocational Education and Training (VET) providers.
Captain Cook College was a vocational college that sought to profit from the Commonwealth’s VET FEE-Help funding scheme. The scheme, now replaced by VET student loans, was very poorly designed.
VET providers earned Commonwealth fees for all registered students at specific ‘census’ dates, whether or not the student completed the course, whether they had any capacity to do so, and without any quality control measures around sign-up processes or quality of teaching.
Worse still, upon signing up, students took on debt in favour of the Commonwealth for 120 per cent of the course fee.
The Commonwealth scheme was explicitly designed to encourage people from underrepresented and underprivileged backgrounds into VET programs. Predictably, the scheme resulted in an explosion of predatory sales and marketing practices targeting vulnerable consumers.
Captain Cook College’s business model was typical of the sort of malpractices that flourished under the scheme. The College hired marketing agents and recruiters (called ‘course advisors’) to sign up students for its online courses.
Working for commissions, and without appropriate training and supervision, many recruiters won student enrolments through misleading conduct, pressure tactics and offers of ‘free laptops’ and other incentives.
Many recruited students were unsuited to – or incapable of completing – the course in which they were enrolled. Many had no idea of the financial burden they accepted with their ‘free’ laptop.
The College originally had safeguards in place to address the patent risks of enrolling ‘unwitting or unsuitable’ students. These processes checked that students understood the financial burden of enrolling and were able to undertake the course.
They led to around half of the students withdrawing before the census date – and therefore before the College became entitled to government funding, and recruiters earned their commissions.
The safeguards made the recruiters unhappy and were an ‘impediment’ to College profits.
So, the College decided they had to go. With the removal of these safeguards, far more students stayed enrolled, and the College’s profits skyrocketed.
College income earned from the VFH Scheme rose from AU$326,125 in August 2015 to approximately AU$18.9 million in December 2015.
Unfortunately, this also meant many students unwittingly incurred substantial debts for courses they would never even start.
Before the High Court, the College argued, among other things, that it did not intend for the recruiters to engage in the misconduct. It admitted that its enrolment processes were ‘imperfect’, but claimed they did not constitute the kind of reckless, knowing and intended misconduct that would break the law.
All the High Court justices agreed that the College had engaged in unconscionable conduct. But the reasons of Justice Gordon and Justice Edelman are ground-breaking because they lay out and apply tests for identifying the blameworthiness of organisations, as responsible entities in their own right.
Corporate fraud and predatory behaviour are common, harming consumers, fair traders and society as a whole.
Yet, as the Banking Royal Commission showed, too often corporations are structured to allow them to avoid or limit responsibility, to hide behind excuses of ‘system errors’ and ‘incompetence’.
This sort of reprehensible strategy works because the law traditionally requires courts and regulators to find a single, responsible person within the corporation who can be blamed. This game of ‘Where’s Wally’ works perfectly well for small, hierarchical ‘mum and dad’ companies.
However, in an age where corporate business models are often complex, using natural and corporate third parties, and teams of employees, ‘Wally’ is frequently nowhere to be found.
Using this approach, corporations can and do avoid full responsibility for harms caused by third parties (like the recruiters in this case).
Even worse, with increasing integration of automation and AI into corporate activity, the game is in danger of morphing into a completely senseless search for ‘Where’s WALL-E’.
In this context, the High Court’s decision is a game-changer. It provides a powerful, principled and practical way of unmasking corporate fraud and predatory practices, by proving corporations’ true knowledge and intentions.
It does this by explaining that corporations ‘think through their systems’: corporations’ everyday processes and practices reveal and enact their intentions, knowledge, values and beliefs.
From this perspective, the College was necessarily and fully aware both of its own enrolment safeguards and why they were there: to counter-act the risk of recruiter misconduct and enrolment of students unsuited to the course of study.
In that light, its decision to remove these steps had only one aim: to increase profits by enrolling unwitting and unsuitable students.
Simple. Powerful. Undeniable. And arguably applicable to systems large and small, private and public alike. Like, for example, Robodebt.
The model endorsed by the High Court in this judgment was developed by the author. Professor Bant's work, including research conducted with Professor Jeannie Paterson of Melbourne Law School, was cited in the judgment as having contributed to the decision.
Their research was supported by Australian Research Council grants.