Regulating the regulators: IBAC warns of corruption risks

Regulatory agencies play a key role in ensuring integrity and public trust in government, but their location at the intersection of money and government power makes them particularly vulnerable to corruption.

Poor conflict-of-interest management, bribery and fraudulent reporting are some of the key risks regulatory agencies face, says Victoria’s corruption watchdog.

“Responsibility for inspections and licensing, combined with high levels of discretion in some decision-making and access to sensitive information, provide opportunities for corruption to occur,” says Independent Broad-based Anti-Corruption Commission boss Robert Redlich QC.

To help agencies manage these risks better, IBAC has released a report exploring potential problems and how to address them.

Key drivers that can increase the corruption risks faced by regulatory authorities include:

• A lack of transparency around public reporting of activities
• Industry and regulatory capture, the process by which regulatory agencies or their employees inappropriately identify with the interests of the client or the industries they are tasked with regulating
• Employment of people with histories of misconduct or corrupt conduct
• Targeting by organised crime groups to elicit information.

The mismanagement of actual, potential or perceived conflicts of interest is one of the biggest sources of complaints to IBAC.

“This is particularly the case where regulatory officers work collaboratively with the industries they regulate, and for regulatory bodies that receive revenue from the industries they regulate,” argues the report.

This is often a problem with the agency’s board, too — while people with ties to the industry bring vital knowledge, they also bring a web of relationships that can complicate the regulator’s job.

Inspectors typically have a high level of discretion, which increases the opportunity for corruption. This might involve an inspector going easy on a company in exchange for bribes or goods in return, for example. Ensuring inspectors are not working alone can help mitigate some of this risk, says IBAC.

Many staff at regulatory authorities have high levels of access to sensitive personal and business information, sometimes with relatively low levels of accountability. “The inappropriate accessing and use of sensitive information is a significant corruption risk that has been frequently detected in IBAC’s investigations across the public sector,” the report argues.

The close relationships engendered by living in a small community are another problem for regulators. Staff in regional locations are more likely to know regulatees personally. It’s harder to maintain professional distance if you bump into someone at the shops or weekend sport.

IBAC also found that “when corrupt conduct does occur in regional offices, it may be more difficult to detect and report because regulatory officers may be geographically remote from management oversight.”

The watchdog also identified that reporting of regulatory outcomes varied across regulators, especially in the information being reported back to the regulated entities. There is evidence to suggest a lack of transparency by regulators can not only enable misconduct and corruption, and also hide it when it does occur.

The report also includes data on the number of complaints it has receive about different regulators over a four-year period. IBAC cautions that complaints data is an imperfect measure — they are unproven and bodies dealing with the public are heavily represented — but they provide an interesting picture of where regulatory integrity stands currently.

The five most complained-about agencies were VicRoads, the Victorian Building Authority, WorkSafe, the Metropolitan Fire and Emergency Services Board and the Country Fire Authority. Allegations made against the top five regulators included receiving financial bribes for licences, failure to issue licences in line with legislation, collusion to prevent compensation, and covering up inappropriate conduct.

Prevention and detection strategies

IBAC includes a range of recommendations for regulators to help them deal with integrity risks.

• All public bodies should have robust frameworks in place to prevent and detect actual, potential and perceived conflicts of interest. This includes proactive and clear policies for identifying, declaring and managing all conflicts of interest, and to have a gifts, benefits and hospitality policy and an associated public register.
• To mitigate corruption risks associated with inspections and ensure greater accountability, regulators should consider specifying that high-risk inspections must be conducted by at least two inspectors.
• To prevent information misuse, regulators should have robust information security management and training for all employees that addresses the value of sensitive information held and how it could be misused.
• Transparent public reporting by regulators is an important way of assuring the community that these public bodies are operating with integrity. Improved transparency and reporting of regulators’ performance and decision-making may also help reduce the risk of corrupt conduct going undetected.
• Taking a risk-based approach to regulation ensures that regulatory activities are well targeted and make the best use of resources. It is also a way of increasing transparency and reducing the risks of corruption and misconduct by employees of regulatory bodies.
• Joint inspections of business practices or premises by different regulatory authorities represent a good practice that helps improve both the quality and integrity of regulatory action. Joint inspections improve the transparency of decision-making by different regulators and provides regulators with increased oversight and understanding of each other’s practices. There is scope for this approach to be applied more broadly.
• As for all organisations, it is important for regulators to have sound processes for recruiting and vetting employees. All public bodies, including regulators, should maintain high standards of integrity in recruitment and baseline screening practices.