Media Information Kit #1 – How to Steal $100 Million

Media Information Kit #1   The Provident Fund Frauds

How to Steal $100 Million

Introduction Superannuation is a mystery to most people including members of the media and politicians. It is therefore necessary to provide an understanding of some of the basic elements and legal principles that govern the way superannuation funds should operate. There are different types of funds which also adds to the complexity. Superannuation funds are the perfect targets for white-collar criminals since very large amounts of other people’s money is under the direct control of a very small number of “trustees”, who may be “trustees” in name only. Superannuation Trustees are not required to hold “annual general meetings” where the members are able question the Directors on how their fund is being administered. In many funds the members have no say in the appointment and removal of Directors of the corporate Trustee. This is the perfect environment for fraudulent conduct. If you asked the question: “How do you steal $100 Million Dollars?” Most people would answer with great difficulty – however it is remarkably easy to steal $100 million. One of the most well known “blue-collar crimes” is “The Great Train Robbery” when over £2.6 million was stolen in 1963 from a Royal Mail train heading between Glasgow and London (the equivalent of £48 million today or A$92 million). The ringleaders were sentenced to 30 years in jail. However in Australia well known white-collar criminals can steal and equivalent amount and the law enforcement agencies provide the perpetrators and their accomplices with “protection”. No lengthy jail sentences for white-collar criminals! The Chairman of ASIC is calling for increased penalties for white-collar crime, but increased penalties are a waste of time if there is no will to enforce these laws except in relative minor cases of white-collar crime where the perpetrators have no “friends in high places”. Question “Why has the Parliament of Australia made it a criminal offence for a Trustee of a large superannuation fund to wilfully conceal the original Trust Deed of the fund from persons who have a beneficial interest in that fund?” To understand the answer to this question requires some basic knowledge of superannuation funds. There are two types of superannuation fund:
  • Defined Benefit, and
  • Defined Contribution.
Most older Australians are members of Defined Benefit funds, while most younger Australians are members of Defined Contribution funds. Defined Contribution funds are also called accumulation funds and money-purchase funds. Most superannuation funds are based on the legal concept of a “trust”. Members of superannuation funds do not hold an individual contract with the Trustee or Trustees of the fund. If they did there would be an exchange of contracts and the members would retain a copy of the contract with the Trustee or Trustees. The contact would specify what their entitlements would be. In family trusts some beneficiaries may be children or even yet to be born, so exchanging contracts would be pointless exercise. Instead of an exchange of contracts, in a trust the law provides a right of access to the Deeds held by the Trustee or Trustees, including the original Trust Deed that established the trust and any instruments that purport to amend the terms of the trust. The law makes the heroic assumption that Trustee will act honestly and in the best interests of the beneficiaries of the trust, however that is only an assumption. What are the Differences? In a Defined Benefit fund both member contributions and employer contributions go into a common asset pool, whist in a Defined Contribution fund each member has an individual investment account which increases with contributions and investment returns. Since a member of a Defined Benefit fund does not have an individual investment account whatever benefit he or she finally receives is based on a formula contained in the “terms of the trust” or the “Regulations of the Fund”. Since there is not “contract” between each member and the Trustee or Trustees the law gives the members and beneficiaries of the fund the right to have access to all the documents that determine the “terms of the trust”. The most important document of all is the original Trust Deed that established the trust. This important legal document will confirm if a legally valid trust was established in the first place and who are the persons entitled to receive a benefit under the terms of the trust. Since a superannuation fund is expected to last for many decades, provision is generally made to allow the terms of the trust {Regulations of the Fund} to be amended from time to time. Therefore the original Trust Deed should include a Power of Amendment. If no amending power is provided when the trust was established, then the terms of the trust are effectively “locked in stone” can only be amended by a Court or by an Act of Parliament. An Act of Parliament is required to add an amending power if none is provided in the original Trust Deed. Any amendments however have to be made for promoting the purpose of the trust and not for an ulterior motive nor for reducing entitlements under the trust. A Trustee is the quintessential “fiduciary” who must act in the best interests of the beneficiaries of the trust. A Simple Defined Benefit Fund Consider a simplified Defined Benefit fund with 1000 members where the original Trust Deed provides a benefit of $500,000 for each member on retirement. If most members are near the age of retirement, the fund should have around $500 million in assets to cover benefit payments. This $500 million is held in a common asset pool and is not identifiable as belonging to a particular member. The employer-sponsor is taken over by a new management team who quickly identify $500 million under the control of the Trustees of the employees’ superannuation fund. The incumbent Trustees are replaced by new trustees by the new management team. A fraudulent “Trust Deed” is the drafted that provides only $400,000 for each member and so only around $400 million in assets is required to provide benefits leaving a surplus of $100 million. Some “creative accounting” is then used to transfer the surplus out of the employees’ superannuation fund into the pockets of the new management team that gained control of the sponsoring employer. The superannuation fund accounts do not form part of the accounts of the publically listed company and so are not subject to the scrutiny of analysts and the financial media. Chapter 4 of the book titled “Creative Accounting” by Ian Griffiths is called “How to Pilfer the Pension Fund” There is no requirement for auditor rotation for superannuation fund as there is for publically listed companies, so a “friendly” auditor will turn a blind-eye to the fraudulent “Trust Deed” and claim that assets cover liabilities in his audit report. That is how easy it is to steal $100 million. Why rob a train when you can rob with a pen? How to Steal $100 Million If a member of the fund becomes suspicious then the original Trust Deed is concealed and the fraudulent document is represented as the “Trust Deed” to someone who is likely to have little understanding of the laws of trusts. Even if they took a copy of this document to their local lawyer, the lawyer could be easily convinced that the purported “Trust Deed” was a valid legal document without being able to compare it with the original Trust Deed. It is for this reason that the Parliament of Australia has made it a criminal offence for a Trustee of a regulated superannuation fund to wilfully conceal the original Trust Deed from persons who have a beneficial interest in that fund.