Consumer Affairs VictoriaStopping Rogue TradersResearch Paper No. 11 November 2006

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Because this publication avoids the use of legal language, information about thelaw may have been summarised or expressed in general statements. Thisinformation should not be relied upon as a substitute for professional legaladvice or reference to the actual legislation.

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Preface > i

Preface

The experience of consumer agencies is that the greatmajority of businesses comply with the laws thatprotect consumers, or would do so if they were awareof their obligations. There is a small percentage ofbusinesses, however, that deliberately breach the law.

These rogue traders intentionally engage in ongoingactivities that exploit consumers, especially takingadvantage of the vulnerable and disadvantaged. Theycan be difficult to detect and stop, often adoptingschemes to hide their identity and location. They donot respond to the light-handed approaches used toencourage compliance among honest businesses, suchas informing traders of their rights and responsibilities.Hence, consumer agencies need to target rogue tradersspecifically to detect and deter their activities, deterperpetrators, and to protect consumers and legitimatebusinesses.

This research paper is one in a series designed tostimulate debate on consumer policy issues. It is linkedto the discussion in an earlier paper entitled What dowe Mean by ‘Vulnerable’ and ‘Disadvantaged’ Consumers?as such consumers can be targets for rogues, androgues can inflict severe hardship on those least ableto protect their own interests.

Consumer Affairs Victoria would like to thankDeborah Cope from PIRAC Economics for herassistance in preparing this paper.

Consumer Affairs Victoria would welcome yourcomments on the paper. These may be directed to:

Ms Sally MacauleyConsumer Affairs VictoriaLevel 17, 121 Exhibition StreetMelbourneVIC 3000Tel: (03) 8684 6091Email sally.macauley@justice.vic.gov.au

Dr David CousinsDirectorConsumer Affairs Victoria

Stopping Rogue Traders > iii

The motivation of traders that do not comply withconsumer regulation ranges from those that areunaware of the law and inadvertently breach theirobligations, through others that periodically behaveinappropriately due to circumstances such as financialpressure, to those that deliberately engage in ongoingactivities to exploit consumers. This latter group areknown as ‘rogue traders’. In practice, it can be difficultto determine which traders fall into the category of‘rogues’, because the seriousness of the activity thatshould give rise to such a classification is a matter ofjudgement.

Nonetheless, it is clear that the detriment caused byrogue traders is significant. While relatively small innumber, they can:

• have large financial and emotional impacts onconsumers

• disadvantage ethical competitors

• owe large amounts of money to suppliers andgovernment agencies (which have little chance ofrecovering that money), and

• divert the resources of regulators to pursuing theirdetection and prosecution.

Given rogue traders’ tendency to target consumerswhen they are vulnerable, the damage they causeindividuals is often severe. All consumer agencies areconsequently concerned about rogue traders andmany are implementing strategies to protectconsumers. A Commonwealth, state and territoryworking group under the Ministerial Council onConsumer Affairs produced The Little Black Book ofScams to inform consumers about the tactics used bysome rogue traders and how to avoid them (MCCAworking group 2004). In the United Kingdom (UK) the2005 strategy A Fair Deal for All foreshadowed newinitiatives to improve the effectiveness of enforcementagainst rogue traders (DTI 2005, pp. 20–21) and theEuropean Union is considering how to minimise theproblems caused by rogue traders that operate acrossborders. (EU 2003)

The paper discusses the problem of rogue traders,why they are difficult to control, the role of generalconsumer regulation, licensing and consumerawareness in stopping rogues, and other policies thatcould target rogue traders. It identifies key issues fordeciding how best to regulate rogues.

Stopping roguetraders

Preface iStopping rogue traders iii

What are rogue traders? 01

What are the effects of rogue traders? 03

Why are rogue traders difficult to stop? 073.1 Ability to generate quick returns 073.2 Consumers may not protect themselves 083.3 Strategies to avoid detection 093.4 Links to crime 10

Policies that deal with rogue traders 11

The role of consumer policy tools 135.1 Enforcement under the Fair Trading Act 135.2 Industry specific regulation including

licensing 185.3 Creating informed and aware consumers 19

Other regulatory tools that targetrogue traders 21

6.1 Companies regulation 216.2 Trade Practices Act 23

Coordinated action 25

Expanding the tools 298.1 Disruption techniques 298.2 Rapid response strategies 308.3 Raising awareness 308.4 Intelligence gathering 31

Choosing policy approaches 339.1 Regulatory costs for consumers

and ethical traders 339.2 The effect of regulation on trader behaviour 349.3 Combining regulatory strategies 34

Bibliography 35

Consumer Affairs VictoriaResearch and Discussion Papers 37

Contents

What are rogue traders? > 01

Generally, rogue traders seek to unfairly exploitconsumers for their own benefit. Rogues knowinglyand consistently breach the law, and usually have inplace strategies to avoid being detected or prosecuted.They try to pass themselves off as legitimate tradersand often prey on consumers when they are at theirmost vulnerable.

Rogue traders can be Australian- or overseas-based.Some of their activities involve scams1 (Box 1).

What are roguetraders?

1

1 In some scams, such as advanced fee fraud (where promoters ask their victims to assist in transferring money out of another country) theperpetrators do not attempt to present themselves as legitimate businesses. These scams, while still a significant problem, are outside thescope of this paper. The perpetrators of other scams, however, like those described in Box 1, often fall within the definition of ‘rogue trader’.

Box 1: Scams

Investment and financial scamsRogue traders promoting investment and financialscams claim to be financial advisers, stockbrokers orportfolio managers. They generally offer share, mortgageor real estate 'investments' and promise their victimshigh returns on their money. Such scammers may alsoencourage their victims to trade in foreign currency.Many of these scam promoters are based overseas.

In a typical real estate scam the promoter inflates theprices of investment properties to well above fairmarket rates and attempts to sell them, typically tobuyers who do not live locally. When a victim laterseeks to sell such a property, he or she discovers thatenormous losses on the original purchase price will besuffered. Scam promoters bank on their victims notknowing the value of real estate in the area and oftenpromote their offers as 'once-in-a-lifetime' opportunitiesand use high pressure tactics to secure sales.

Employment schemes: envelope stuffingAdvertisements for self-employment opportunities inlocal papers offer work stuffing envelopes. Consumersare required to pay some money up front for workthat never eventuates. Once they have paid theirmoney, consumers often discover that there are noenvelopes to stuff. All they generally receive isinstructions on how to lure others into the scheme.

One scheme asks consumers to send between $32 and$45 to cover a registration fee, postage and handling.Those who do, receive photocopied sheets advisinghow to place advertisements similar to the one towhich they responded and 'How to start a mail orderscheme from home stuffing envelopes'.

Medical, health and weight loss claimsUnsolicited mail order scams, spam and internet sitesoffer weight loss products and miracle cures forillnesses such as cancer and HIV/AIDS. Scampromoters might claim, for example, that a 'slimmingcapsule' will quickly and effortlessly reduce therecipients weight by a large amount and the scamcorrespondence will assert ‘Lose 30 kilos in 30 days!’,or ‘Lose weight while you sleep!’ Testimonials frompeople who purport to have used the product mayclaim they lost 40 kilograms in 40 days and were ableto keep this weight off without exercising or alteringtheir diets. Consumers who purchase such weight lossproducts find they have spent significant amounts ofmoney on worthless products.

Source: CAV 2005a, List of Scams

02 > What are rogue traders?

It is useful to distinguish rogue traders by theirdeliberate, ongoing intent to exploit consumers andavoid detection. Therefore, the key feature thatdistinguishes rogues from others that breach consumerregulation is their motivation, that is, consciousintentions to:

• deceive consumers or exploit their lack ofknowledge or understanding to obtain payment forgoods or services that consumers would not buy ifthey made informed objective decisions

• undertake this deception on an ongoing basis, and

• avoid detection and/or the consequences of gettingcaught.

As it is difficult to observe people’s intentions ormotivations, it is useful to look for behaviour thatwould indicate that someone is a rogue trader. Suchindicators include:

• a history of breaching consumer regulation

• undertaking activities that individually or incombination cause considerable consumerdetriment

• persistently failing to respond to concerns raised bycustomers

• failing or refusing to address issues raised by theregulator

• adopting business strategies to avoid detection orresponsibility for illegal or unethical actions

• using strategies to conceal the identity of the personor people conducting the activities of the entity

• operating outside the ethical norms of the industryin which activities are being conducted, and

• using predatory behaviour to target vulnerable ordisadvantaged consumers.

Meeting any one of the indicators listed above maynot prove a trader is a rogue, nor is it necessary tomeet all the indicators, but any operator that conductsits activities consistent with several of the listedindicators is likely to be a rogue trader.

Of most concern to Consumer Affairs Victoria are‘major rogues’: those rogue traders that cause largeamounts of damage; are highly predatory, dishonest orexploitative; have a history of rogue behaviour; and donot respond to light-handed approaches to resolvingconsumer issues. The discussion in this paper covers allrogue traders, not just major rogues.

What are the effects of rogue traders? > 03

Rogue traders impose costs on consumers, the industriesin which they operate, suppliers and taxpayers.

• Consumers lose money because of overcharging.They pay for goods or services that are not providedor are substandard, and/or to fix faulty goods orworkmanship.

• Consumers and their families suffer distress andemotional pressure.

• Legitimate businesses are disadvantaged becauserogue traders cause consumers to distrust theirindustries, which reduces demand and theopportunity for legitimate businesses to sell theirservices. Legitimate businesses also lose sales due tounfair competition from rogues.

• Rogue traders usually leave a trail of bad debts,imposing costs on other businesses and affectingsuppliers and other traders (such as hotels andrestaurants).

• They evade Commonwealth and state taxes, placingan additional burden on other taxpayers.

• Taxpayers must meet the cost of governmentpursuing and prosecuting rogue traders. As manyrogue businesses have few assets, these costs areoften not recouped, even if offenders are convicted.

It is virtually impossible to get an accurate statisticalpicture of the size of the rogue trader problem. It isdifficult, without some investigation, to know whethera trader that has breached consumer regulation is arogue. Consumers making complaints do notnecessarily know they are dealing with rogues, so it isdifficult to separate data relating to rogue traders fromother complaints data held by Consumer AffairsVictoria. Many cases are also unreported. The report ofthe Victorian Drugs and Crime Prevention Committeerecognised the problem of under-reporting.

Many people do not report fraud, as they feel it issomehow their own fault and they do not want others tosee them as ‘foolish’. (DCPC 2004, p. vi)

In a study of rogue itinerant traders, offering bogusproperty maintenance services door-to-door, theUnited Kingdom Office of Fair Trading suggested fourmain reasons for victims under-reporting:

• embarrassment

• fear induced by pressure from the offender not toreport the incident, or concern (particularly amongthe elderly) that their family would conclude theycannot look after themselves

• victims being unaware they have been duped, and

• feeling that reporting is futile as nothing willhappen. (OFT 2004a, p. 92)

While recognising data collection difficulties, theUnited Kingdom estimated the size of their rogueitinerant trader problem using police data from severalregions. Their estimates were indicative only, but thedata suggested that the United Kingdom had about250 cases per million people each year. On averageeach case cost consumers around £2,500. (OFT 2004b,pp. 2–4)

The UK Office of Fair Trading estimates thatconsumers lose about £1 billion to scams each year(OECD 2005, p. 9). In the United States consumersreported to the Fair Trading Commission that they lostUS$545 million to fraud (OECD 2005, p. 17). Becauseof under-reporting, actual losses would be much higher.

Despite the lack of data on rogue traders in Victoria,there is considerable evidence that there is a significantproblem.

• Consumer Affairs Victoria is currently investigatingor taking proceedings in relation to investment andproperty based scams that together are estimated tohave cost Victorians about $9 million dollars.

What are theeffects of roguetraders?

2

04 > What are the effects of rogue traders?

• Australians have lost at least $400 million intelephone investment fraud (ASIC 2005a). TheAustralian Securities and Investments Commissionhas on its database the names of about 200 overseasbusinesses that do not hold Australian financialservices licences and have made unsolicited phonecalls to Australians.

• New scams are emerging all the time, and scammersare constantly reinventing old scams. There is noevidence that this problem is decreasing and greateruse of the internet provides a new mechanism thatgives scammers widespread access to potentialvictims. (MCCA working group 2004, p. 5)

• Consumer Affairs Victoria identified concerns about:

The ease with which rogue traders can escape CAVaction by utilising the bankruptcy laws and later re-establishing themselves in new phoenix organisations. Anumber of traders named for poor service in last year’sannual report have taken this route this year, thusavoiding their obligations to compensate consumers fortheir poor trading. Amendment to the Commonwealthcorporations law is necessary to deal with this problem.(CAV 2004a, p.7)

• A series of reports on phoenix companies have allconcluded that, while difficult to measure, phoenixactivity is a significant problem. These reportsinclude the Victorian Law Reform Committee (LawReform Committee 1994, pp. 9–10), the Cole RoyalCommission (Cole 2003, pp. 127 and 161), andRankin and Popkin (2004, p. 40).

Almost all regarded the problem [illicit phoenix companyactivity] as a serious one requiring the attention of thelegislature and were supportive of strengthening measuresagainst phoenix companies. For example, the Tax Officequestioned whether the legislation governing voidablepreferences, insolvent trading and fraud was sufficient tocounter phoenix type activity. (Joint Committee 2004,p. 139)

• A confidential report on rogue itinerant traders inAustralia estimated that traders engaged in fraud canmake about $10,000 a week. Itinerant traders areknown to operate in Victoria.

Rogues often target vulnerable or disadvantagedconsumers and the social and personal consequencesof the losses caused by a rogue can be very high. Thepotential for rogue traders to harm consumers isillustrated in the examples in Box 2.

(continued)

Box 2: The impact of rogue traders on consumers

Itinerant trader offering roof repairsAn elderly homeowner was approached by two menoffering to repair tiles on the roof of her home. Theyhad completed work on her neighbour’s house so sheassumed they were competent, but she later discoveredtheir work was sub-standard and incomplete. Worse,being arthritic, she asked one of them to fill in thecheque for her when the work was completed. Theyaltered the cheque, originally made out for $100, toread ‘$2,100’. The villains duped her of most of hersavings. (Commonwealth of Australia 2005, p. 2)

‘Interest-free’ loanTwo hundred and twenty Queenslanders invested$2.4 million in ‘The Carsworthy Scheme’. People weretold if they purchased a car through a car buyers’ club,and borrowed a little more from their financier andinvested it offshore, the high returns would repay theircar loans. In fact, when the offshore investments failedto deliver promised returns, people were left to findtheir own repayments, often for very high loans thatthey would probably not have entered into otherwise.

Another case involved Wide-I Design Corporation (acompany registered in Vanuatu), ETP Ventures Pty Ltdand Cyrus Strategies Pty Ltd. Car and home loanswere offered on a similar basis to that outlined above.Investigations by the Australian Securities andInvestment Commission found that, combined, thesetwo schemes took at least $4.6 million from around400 investors. (ASIC 2005b, p. 1)

SkybizSkybiz purported to sell online tutorials on Web-basedproducts. It was actually a massive illegal pyramidscheme, which was estimated to have connedconsumers around the world out of approximately$175 million (FTC 2001, p. 1). Around 156,000Australians were affected. (ACCC 2005a, p. 1)

Central Casting, Global Capital Casting and MMPromotionsKevin John Sims operated modelling andentertainment agencies. Sims advertised in theemployment sections of newspapers throughoutVictoria and promised work in modelling or theentertainment industry. He demanded up front feesand failed to honour promises and assurances givento prospective actors and models.

Consumer Affairs Victoria sought an injunctionprohibiting Sims from engaging in misleading anddeceptive conduct and running businesses as amodelling agent, casting agent or employment agent.In addition to the injunction to cease trading, theCourt ordered Sims to refund a total of $172,293 to 23people ($7,491 each) who had not received theservices for which they had paid. (CAV 2004a, p. 68)

What are the effects of rogue traders? > 05

The potential for rogue traders to affect legitimatebusinesses and undermine consumer confidence iswell recognised. For example,

The Federation of Master Builders [in the UnitedKingdom] estimates that their members lose up to£1.5 billion to cowboy builders each year, a fairproportion of whom will be bogus doorstep traders. (OFT2004a, p. 91)

To the extent that ‘cowboys’ are removed, the overallreputation of the industry is enhanced, i.e. regulationremoves badly behaving firms from the industry thatcontaminate the reputation of all firms in the industry.(Llewellyn 1999, p. 45)

Effective control of this illegal activity is important forregulators and businesses alike … It is important forbusinesses because illegal operators can undercutlegitimate businesses, often by quite considerable sums.(Hampton 2005, p. 38)

The impact on government agencies is also significant.Rogues divert resources to detecting and pursuing arelatively small number of individuals. This potentiallyconstrains regulators’ other activities, such asinforming and educating consumers or assistingethical businesses to understand their obligations.

Consumer affairs agencies in Australia have recognisedthat good information is not available on the activitiesof rogue traders in Australia. A new AustralasianConsumer Fraud Taskforce was established in March2005. One of its roles is generating greater interest inresearch on consumer fraud and scams.

Box 2: (continued)

Gino MemorialsGino Carmignani, a stonemason, approached familiesat grave sites, offering to build lasting memorials forrecently deceased family members. He offereddiscounts for cash and immediately requested depositsof thousands of dollars. He would later go toconsumers’ homes to request further payments.

He accepted over $63,000 for memorials that werenever built, taking $17,000 in one case, and between$2,500 and $8,000 each from other victims. TheMelbourne Magistrates’ Court ordered him to repaythe money. (Bachelor 2005)

Why are rogue traders difficult to stop? > 07

Rogue traders can be difficult to detect, identify andprosecute because they choose industries and adoptstrategies that make detection more difficult or reduceregulators’ ability to impose fines or recover losses ifthey are caught.

While rogues can emerge in any industry, someindustries are more vulnerable to rogue activities.Rogue traders are most often found selling informationtechnology services, home maintenance, motorvehicles, or wealth creation schemes, and oftenoperate door-to-door. They frequently focus onindustries or regions where there is a high proportionof vulnerable consumers, and are most common inindustries where:

• it is possible to obtain large financial gains quickly

• consumers fail to protect themselves, because it isdifficult to judge the quality of the product orservice or they succumb to offers that are ‘too goodto be true’, and

• authorities have difficulty catching and prosecutingrogues, because the industry lends itself toemploying strategies to avoid detection.

Rogues may also be found in industries where theproducts or services being sold are linked to criminalactivities, such as selling stolen goods through secondhand goods stores or motorcar yards.

Rogues usually seek to obtain large financial gainsquickly. This allows them to maximise their takingsand move on, reducing the risk of being caught. Thiscould include targeting many people simultaneouslyfor relatively small amounts of money or targetingsmall numbers of people for larger amounts.

Rogue traders often use the internet to access largenumbers of people quickly. They request up front feesfor registration or administration, postage andhandling. Fees may be less than $100; such scams relyon many people paying. The Rogue pockets themoney and does not send the goods or servicesexpected.

The home repairs, investment and real estateindustries often involve large transactions, and aretherefore industries in which rogues can extractthousands of dollars from victims and never deliverthe products promised prior to sale (Box 3).

3Why are roguetraders difficultto stop?

3.1 Ability to generatequick returns

Rogues may also target industries where they can gainfinancially by operating illegally. By avoiding the costof purchasing a licence or meeting the regulatedindustry standards, for example, a rogue can obtain afinancial advantage over its ethical competitors.

These financial incentives can be large in industrieswhere regulation restricts the number of traders thatcan enter the industry or the level of output they canproduce. In these industries new entrants purchaselicences before they can start their businesses, or needto pay for a significant amount of good will. The costof legitimately entering such industries, and the profitfrom operating unlicensed, encourages rogue traders tooperate illegally. Similarly, if the cost of meetingindustry standards is very high, there can be anincentive for rogues to not comply with the standardsand subsequently undercut legitimate businesses.

Rogues rely on consumers failing to recognise thatproducts or services they are being offered are notlegitimate or not worth the asking price. To achievethis, rogue traders:

• offer goods for sale, unseen, through the internet orby telephone

• focus on goods and services of a nature that makesit difficult for consumers to judge their qualityeither prior to purchasing and using them(experience goods) or unless something goes wrong,requiring them to rely on the honesty of traders toensure the products or services meet theirexpectations (credence goods), or

• use high pressure or other sales tactics to convinceconsumers to buy products or services, even thoughthe benefits claimed are unrealistic.

A report in the United Kingdom on doorstep (door-to-door) selling noted that the problem of judging thequality of services was common in propertymaintenance because:

The consumer, especially if they are elderly, may havedifficulty in checking the extent and quality of the workcarried out. (OFT 2004a, p. 83)

Rogue traders often target industries where consumershave more difficulty protecting their own interests, asthis increases rogues’ chances of successfully deceivingconsumers.

Rogue traders also operate in industries where they canadopt business practices and strategies that concealtheir rogue activity, making it harder to identify andcatch perpetrators or, if perpetrators are caught, torecover the losses. They may use one or more strategiesto avoid detection and prosecution, including mobilityand anonymity, and avoiding compensating victimsby exploiting loopholes and dispersing assets.

08 > Why are rogue traders difficult to stop?

3.2 Consumers may not protectthemselves

3.3 Strategies to avoiddetection

Box 3: Itinerant tradersItinerant trader offeringroof repairs

Some itinerant traders are conmen who travel fromtown to town, touting for work. They come in fromoverseas each Spring and operate through to March,with scams that can involve asphalting, fencing,painting, carpet cleaning and roofing. The quotesgiven can be exceptionally low and the work done, ifany, is usually shoddy or incomplete. As soon as theyare detected in one town they vanish, only toresurface with the same scam in another State. Theiridentification papers are often false.

Rogue itinerant traders obtain a quick return byrequiring consumers to pay for the job up front incash and can rush the consumer into a decision bytelling them that the deal is a ‘special offer’ and isvalid only for that day as another customer hascancelled. Rogue itinerant traders even drive theirvictims to the bank to obtain payment and thendisappear, leaving an unfinished or sub-standard job.The rogue may ask their victims for money topurchase materials and then never return. (CAV 2005a)

Why are rogue traders difficult to stop? > 09

MobilityA key strategy rogue traders use to avoid detection ismobility. The Office of Fair Trading described howitinerant traders in the United Kingdom takeadvantage of mobility:

The main problem faced by Trading Standards is the factthat the traders may be highly mobile, often travellinglarge distances for work and are therefore difficult totrace. When complaints are received trading standardsdepartments can often do little because it is after theevent. (OFT 2004a, p. 94)

The problems in Australia are similar. Rogues can bemobile internationally, among states and territories,and across regions. They may remain in the sameindustry or move industries. Mobility helps avoiddetection by exploiting lags in regulators’ ability todetect, identify and prosecute traders. By the time aregulator becomes aware of a problem the rogue willhave moved on, and can no longer be found. Roguescan use mobility more readily in industries where it ispossible to:

• avoid establishing a fixed business address orshowroom

• stay in one location for only a short period andreadily move across regions and among states andterritories

• use sales techniques where the trader goes to thecustomer (door-to-door or via the telephone or theinternet), rather than the customer approaching thetrader

• operate as a small business, and

• easily enter and leave the industry, because of lowoverhead costs, for example, or few regulatoryrequirements before starting trading.

AnonymityCombined with mobility, rogues use anonymity toavoid detection. If consumers do not know withwhom they are dealing, it is more difficult forregulators to identify and catch offenders. In industriesthat accommodate anonymity, rogue traders can:

• hide their identities from customers and regulatorsby:

– using prepaid mobile phones, so they cannot betracked through telephone numbers

– using false names

– using post office boxes rather than streetaddresses, or

– providing first names only to consumers and inadvertisements

• use multiple business names, so it is difficult to trackthe links between the various business entities, and

• contact customers door-to-door, via the telephoneor through the internet.

Exploiting loopholesIn addition to strategies to avoid detection, rogues usestrategies to minimise the consequences of gettingcaught. They exploit a variety of loopholes such as:

• loopholes in legislation that make it difficult toprosecute rogue activity

• gaps in regulators’ monitoring and enforcement

• gaps or inefficiencies in state and territory coordination

• lags in the time taken for different jurisdictions torespond to a problem – if a commodity is banned inone state because it is unsafe, for example, roguetraders may move to other states where they cancontinue to sell the dangerous product, and

• loopholes in international law that make it difficultfor Australia to identify and prosecute rogues thattarget Australian consumers from overseas.

The ability to hold officers and employees accountablefor their actions, separate from the company thatengages them, is important to prevent rogues misusingthe company structure to avoid accountability.Without the power to hold individuals accountable,rogues could exploit consumers, disband the companyresponsible leaving no entity that could be pursued forcompensation or redress, and avoid taking personalresponsibility for their actions.

This is currently not the case. Two recent decisions ofthe Full Federal Court and one of the New SouthWales Court of Appeal1 accepted that directors, agentsand employees of corporations are potentially liablefor their actions if they engaged in behaviour thatwould breach the Fair Trading Act.

One of these cases, Arms v Houghton is on appeal to theHigh Court. The case was heard in October 2006 andConsumer Affairs Victoria intervened in the appeal asa friend of the court. Consumer Affairs Victoriahighlighted the public interest in continuing to be ableto pursue officers and employees of defunct orinsolvent corporations who abuse the corporate formto shield themselves from personal liability for actionsthat breach the Fair Trading Act. A decision on theappeal is due in early 2007.

1 Arktos Pty Ltd v Idyllic Nominees Pty Ltd [2004] FCAFC 119, Arms v Houghton [2006] FCAFC 46, and Wong v Citibank Ltd [2004] NSWCA 396.

10 > Why are rogue traders difficult to stop?

The problems casued by inconsistency in regulationhave also been recognised.

The European Union highlighted how rogues canexploit loopholes between countries:

The European Advertising Standards Alliance concludedin its 2002 annual report that ‘cross-border complaintsoverwhelmingly concern the activities of 'rogue traders'and other fringe operators, who deliberately set out toexploit the loopholes between national regulatorysystems’. (EU 2003, p. 2)

The current arrangements facilitated the life of roguetraders operating cross-border within the EU, weakeningthe credibility of the international market for consumers.The regulation on enforcement cooperation is thereforesomething of a landmark for consumer policy … Inaddition, since rogue traders do not stop at the borders ofthe EU, cooperation with third countries will have to bestepped up. (Byrne 2004, pp. 4 and 6)

The risk of rogues operating internationally is rising asthe internet allows them to operate more freely acrossnational borders.

Using these technologies, fraud operators can strike quicklyon a global scale, victimise thousands of consumers in ashort time, and disappear nearly without a trace – alongwith their ill-gotten gains. (Majoras 2005, p. 2)

Asset sheddingAnother tactic rogue traders use to avoid compensatingvictims for their loss is to ensure there are no assetsthat can be called upon to fund compensation. A typicalexample is fraudulent phoenix companies. While notall phoenix companies are rogues (Box 4), this is astrategy that some rogues use to strip a company of itsassets, send it into liquidation to avoid ongoingobligations to its creditors and customers, and then re-establish the same type of business or continue totrade through a related company.

While rogue traders are not necessarily involved inother criminal activities, it is possible that somecriminals are also rogue traders. Many commentatorsaccept that there is clear evidence of criminalorganisations involved in legal activities. Criminalswho are involved in rogue activities are likely tochoose industries that exhibit the characteristicsdiscussed above. Their choice of industry may be alsoinfluenced by links between the legal activity and theirillegal activities. Fiorentini, for example, argued thatorganised crime operators could be attracted tooperating legitimate businesses in areas that:

• provide sources of legitimate income to ‘hide’ trueprincipal businesses

• provide places to trade – so that small shops, barsand restaurants are used to cover activities relatingto certain crimes

• produce outputs that are also needed for operators’illegal activities (such as transportation,communications and warehousing) – takingadvantage of the benefits of integrating legal andillegal activities;

• allow at least part of the profits of crime to belaundered in legitimate businesses – thus reducingthe risk involved in money laundering, and/or

• provide opportunities to diversify portfolios withinvestments that have different mixes of risk andreturns. (Fiorentini 2000, p. 448)

The involvement of criminals, and particularlyorganised crime, in rogue activity generates additionalrisks. These operators may include in their strategies toavoid detection and prosecution, attempts tointimidate and corrupt regulators. They may alsointimidate, threaten or assault their victims to obtainpayment or stop them from reporting rogue activities.

3.4 Links to crime

Box 4: Phoenix companies

A phoenix company is a previously bankruptcompany that restarts under a new identity.

Phoenix company activity is not inherently unlawful.Business failure is not an offence. Nor is it an offence tofail on more than one occasion … Nor [is] it unlawful forthe company’s officers to purchase the assets of the oldcompany from the administrator for use in asubsequent business. (Joint Committee 2004, p. 131)

The Parliamentary Joint Committee noted, however,that some companies ‘abuse the form and theprivilege of limited liability’ by establishing schemesthat deliberately ‘structure their operations in order toengage in phoenix activity, avoid detection andexploit loopholes in insolvency laws’. (JointCommittee 2004, pp. 131 and 132)

Company insolvency has the greatest impact onunsecured creditors. Companies may also fail owinglarge amounts in State and Commonwealth taxes.The impact on consumers varies. Consumers are mostvulnerable when they have an ongoing relationshipwith the service provider, for example a need forspecialist parts or maintenance, when they haveunresolved problems with the product or service, orthe regulator is attempting to obtain redress from thecompany for activities that previously causedconsumer detriment. Insolvency and Trustee ServiceAustralia observed that ‘bad workmanship seems tooften precede financial failure’. (IAIR 2004, p. 24)

Policies that deal with rogue traders > 11

Consumer regulation and other policy strategiesprotect consumers and assist in controlling theactivities of rogue traders. But it is difficult to stoprogues. By their nature, rogues exploit loopholes inregulation and it is difficult to control traders’ intent. Itis necessary to:

• deter rogue traders from entering industries

• act quickly to identify and target rogues before theyavoid detection

• stop offending behaviour so it does not causefurther damage, and

• stop rogues from engaging in similar activities in thefuture.

As no single policy could achieve all these objectives amix of strategies is necessary. As noted previously, theactivities of rogue traders and the strategies they use toavoid detection also vary significantly, so a differentmix of strategies may be needed to target each rogue.

Many policy tools are available. The following sectionsdiscuss the tools used most often against rogue traders.These tools usually attempt to discourage rogues byincreasing the likelihood of being caught, makingbeing caught costly, or increasing the cost or difficultyof continuing rogue activities.

Policies that dealwith rogue traders

4

The role of consumer policy tools > 13

Consumer policy tools are the tools available toConsumer Affairs Victoria. They can be used to targetrogue traders without cooperation from other agencies.

While the Fair Trading Act 1999 (Vic) is not targetedsolely at rogue traders its provisions can deal withrogue activity. The effectiveness of the Fair Trading Actin empowering Consumer Affairs Victoria to deal withrogues can be assessed against:

• the coverage of the Act – whether there areloopholes or gaps that limit Consumer AffairsVictoria pursuing some types of rogue activity

• the size and nature of the penalties and deterrents –whether these are an effective disincentives toengaging in rogue activity or incentives to ceasingsuch activity, and

• the powers to collect information and investigatecomplaints – whether these enable ConsumerAffairs Victoria to build cases against rogue traders.

Many of the amendments to the Fair Trading Act in2003 and 2004 enhanced the powers to detect andstop rogue traders. The 2004 amendments weredirected specifically at influencing compliance.

Coverage of the ActFirst, does Victorian legislation cover all types of rogueactivity? The powers in Victoria’s Fair Trading Act arerelatively broad. Consistent with other Australianjurisdictions, Victoria’s Act includes general provisionsto prohibit unconscionable, misleading or deceptiveconduct. An international comparison of consumerregulation, undertaken by the United Kingdom,identified that general provisions promote complianceand can address broad and changing consumer issues.

The UK does not have the equivalent of a general duty totrade fairly. This can act successfully as a backstop giventhe inflexibility of piecemeal legislation and ease ofpublic comprehension of a simply worded basic right asin Australia and the US. (DTI 2003, p. 33)

Victoria has extended the coverage of its legislation todeal with emerging issues. Since the Fair Trading Actwas passed in 1999 the regulation of consumercontracts and telephone marketing, for example, havebeen amended. Victoria’s legislation is now as broadas, or broader than, other Australian Acts. The TradePractices Act 1974 (Cwth), for example, does notspecifically regulate the fairness of consumer contracts.

Challenges can still emerge, however, as new industrieslike m-commerce develop:

There are also likely to be a number of limitations incurrent legislation to protect consumers using m-commerce. For example, current fair trading legislation inVictoria requires adequate disclosure about terms andconditions of purchase. How will these be transmitted viaa mobile phone given the limitations of the screen?Another example is in the provision of financial servicesadvice online. Prior to doing this, a firm must obtain aconsiderable amount of information about a prospectivecustomer. It is not clear that these regulatoryrequirements can be met using a mobile phone as thesmall phone screens can show a maximum of 100characters. It seems impractical and cumbersome toexpect a customer to tap out the words on a mobilephone handset. (CAV 2002, pp. 16–17)

While new industries can present new challenges thatmay warrant future amendments to legislation, theFair Trading Act appears to be broadly capable, subjectto jurisdictional limitations, of covering theobjectionable activities of most rogue traders.

Second, is Victorian legislation capable of capturing allactivities that are linked to, or affect, Victoria? Couldtraders avoid Victorian laws by locating outside ofVictoria, for example, or encouraging Victorianconsumers to travel interstate or overseas?

5.1 Enforcement under the FairTrading Act

5The role ofconsumer policytools

14 > The role of consumer policy tools

Again, Victoria’s Fair Trading Act has wide application.In 2003 section 6 was inserted into the Act.

6. Extra-territorial application of this Act(1) This Act applies within and outside Victoria.

(2) This Act applies outside Victoria to the full extent ofthe extra-territorial legislative power of theParliament.

This makes the Act applicable where: a trader is locatedor registered in Victoria; the goods or services aresupplied in Victoria; or the trader makes claims aboutthose goods or services in Victoria. While the scope ofthe legislation has not been legally tested, it is unlikelyto cover loss or damage suffered by a Victorian ifneither the transaction nor the trader is located inVictoria – such as where the product was notadvertised in Victoria and was purchased interstate andbrought back to Victoria.

When rogues operate across jurisdictions, there arebenefits to consumer agencies coordinating theyactivities. Even where Victoria could legally takeaction, there may be advantages in another agencytaking the lead in the investigation and prosecution.If a trader is located and active in another state orterritory, for example, that jurisdiction may be in abetter position to pursue the investigation successfullyand it may have other laws, such as licensingrequirements, that could be used to achieve redress forthe activities of the rogue. Coordination is discussed insection 7 of the paper.

Size and nature of penalties and deterrentsThe Fair Trading Act contains a range of penalties anddeterrents, some of which were strengthened by the2003 and 2004 amendments. Generally, the Act allowsrelevant bodies to:

• impose financial penalties on traders and/or requirethem to compensate consumers for the damagethey caused, or rectify that damage

– For example, many sections include penalties forbreaching the Act and a variety of orders can bemade against a person found to have contravenedthe Act (section 158). The Act allows the Directorof Consumer Affairs Victoria to conductproceedings against traders (section142A), orconduct proceedings on behalf of consumers,when he/she considers there is a case that a traderhas breached the Act and pursuing theproceedings is in the public interest (section 105).

• reduce the ongoing damage rogues cause bypreventing them from continuing the objectionableactivity or removing them from the industry

– For example, the ability to obtain injunctions,including cease trading injunctions (section 151A),prevent a trader from transferring money orproperty (section 154), ban dangerous products(section 40), suspend the licence or registration of atrader (section 106D), and accept undertakings thatput conditions on traders’ future activities (section146), and

• make consumers more aware of rogues so they canprotect themselves

– For example, the ability to require traders topublish information consistent with an adversepublicity order (section 153) and allow the Directorof Consumer Affairs Victoria or the Minister torelease public warning statements about roguetraders and their activities (section 162A).

Advertising the identity and activities of rogue tradersis intended to:

1. make consumers aware of the rogues and theiractivities (this issue is discussed in section 5.3)

2. shame rogues into modifying their behaviour, and

3. make other businesses aware that the regulator istaking action against rogue traders, increasing theperception that rogues will get caught and deterringother businesses from engaging in similar practices.

In the case of rogue traders it is important not tooverstate the effectiveness of the second objective.Most rogues do not rely on good will or theirreputation to conduct their business. Actions thatdamage their reputation are, therefore, unlikely to beeffective. Advertising would only damage a rogue if itsuccessfully reduced the risk that consumers would fallfor the rogue’s tactics. The benefits of advertising theactivities of rogues are, thus, greatest in makingconsumers aware of the rogues and increasing theperception that rogues will be caught, deterring othersfrom engaging in rogue activity.

The role of consumer policy tools > 15

As a result of the amendments to the Fair Trading Actin 2003 and 2004 (Box 5), Consumer Affairs Victoriahas greater flexibility in the deterrents it can use tostop rogue traders. Tools such as interim injunctions,‘show cause’ notices and infringement notices allow itto respond more quickly to rogue activity. Finalinjunctions, which require traders to comply withdirectives such as ceasing trading, restraining fromcertain conduct or undertaking specified action, andgreater powers to enforce undertakings, also increaseConsumer Affairs Victoria’s ability to stop rogue tradersre-offending.

In 2004-05, as a result of a greater willingness to takeaction and the effectiveness of the new powers,Consumer Affairs Victoria:

• obtained 72 prosecutions, injunctions anddisciplinary actions and 60 enforceable undertakings

• conducted 72 civil actions, and

• served 347 infringement notices.

Examples of enforcement activities undertaken in2004-05 appear in Box 6.

(continued)

Box 5: Amendments to penalties and deterrents inthe Fair Trading Act

In 2003 amendments to the penalties and deterrentsin the Fair Trading Act approximately doubledapplicable financial penalties and allowed for:

• issuing warnings and naming rogue traders tohighlight their activities to the community

• suspending licences or registrations of rogue traderswhere urgent action is needed to protect consumersfrom substantial harm

• issuing ‘show cause’ notices to traders notifyingthem that Consumer Affairs Victoria believes theyhave breached the Act, requiring them to justifywhy they should be allowed to continue to carryon their businesses

• obtaining ‘cease trading’ injunctions against rogues

• providing for ‘infringement notices’ to be issued forappropriate offences, and

• expanding the Victorian Civil and AdministrativeTribunal’s powers to resolve fair trading disputes.

In 2004 there were further amendments to:

• strengthen the powers to enforce undertakings

• provide for interim injunctions or injunctions torequire traders to undertake activities such asinstituting staff training programs, refundingmoney to consumers, disclosing information orhonouring promises, and

• allow for adverse publicity orders, which requiretraders to publish corrective advertisements oradvertisements that acknowledge breaches of the law.

Box 6: Examples of Consumer Affairs Victoriaenforcement action

Diamond Security Doors and ScreensIn March 2005 Consumer Affairs Victoria tookenforcement action against Mr Michael Johnson,trading under the unregistered business nameDiamond Security Doors & Screens. Mr Johnsonadvertised in newspapers, offering to supply andinstall security doors and screens on private homes.He called on customers by arrangement, gave quotesand accepted large deposits, and then failed to returnto provide the goods. Customers then tried to contactMr Johnson, without success.

Consumer Affairs Victoria obtained interiminjunctions prohibiting the use of the unregisteredbusiness name and restricting Mr Johnson tooperating on a cash on delivery basis. At the finalhearing the injunctions were confirmed, permanentlyrestraining Mr Johnson from accepting payment forthe supply of goods or services until they had beenprovided. Mr Johnson was also ordered to provide fulldetails of transactions he had entered into during aspecified period and compensate 16 consumers fortheir losses sustained as a consequence of thebreaches of the Act.

Livio Cellate, Astvilla Pty Ltd and Perna Pty LtdThe Cellante group offered residential properties forsale in rural areas of Victoria, primarily to Melbourne-based consumers. Arrangements were made forpotential customers to view these properties onSundays, when local estate agents were closed. It wasalleged that the Cellante group urged consumers toconclude sales on the spot, by making representationsabout the property markets concerned and thepopularity of the relevant properties.

Purchasers alleged that they later discovered that theproperties they had bought had been on the marketfor some time at prices much lower than those theyhad paid. It was further alleged that the Cellantegroup had represented themselves as sellers of theproperties, but had in fact purchased the properties (atthe much lower prices) after concluding saleagreements with purchasers.

16 > The role of consumer policy tools

Still, there are two issues that warrant furtherconsideration. First, Victoria’s maximum penalties areconsiderably lower than Commonwealth penaltiesunder the Trade Practices Act. Current maximumpenalties in Victoria are usually around $62,900 for anindividual and $125,800 for a company. Under theTrade Practices Act similar offences have a maximumpenalty of $220,000 for an individual and $1.1 millionfor a company.

Victorian penalties are, however, higher than mostother states’. In New South Wales, for example, thepenalties are $22,000 for an individual and $110,000for a company and in Queensland the maximum penaltyfor offences prosecuted in a summary way is $22,250,and $40,500 if the offence is prosecuted on indictment.

Actual penalties awarded in Victoria are consistentlylower than the maximum allowed under the Act.During the period June 2003 to the end of 2005, mostpenalties imposed were less than $10,000. Only threewere more than $50,000. Research conducted byConsumer Affairs Victoria indicates that, following the2003 amendments to the Act increasing the value ofmaximum penalties that can be imposed, the value ofindividual penalties imposed did not increase. Thetotal value of fines imposed on individual parties didincrease, but this was due to Consumer Affairs Victoriachanging its approach, charging parties with a numberof offences simultaneously.

The penalties imposed under the Trade Practices Actappear to be substantially higher than those under theFair Trading Act. It is difficult to substantiate, however,whether this difference is driven by differences in thecircumstances of the cases or the approaches of thecourts.

There is no clear justification for states imposingpenalties lower than those provided for in theCommonwealth legislation. Increasing the penaltieswould send a clear message about the seriousnessParliament attaches to deliberate attempts to exploitconsumers.

Second, in Victoria it is not possible to seek prisonsentences under the Fair Trading Act, despite some ofthe offences involving fraud and theft, which do haveimprisonment as a possible penalty. In contrast,section 6AA of the Trade Practices Act applies chapter 2of the Criminal Code to offences under that Act,making imprisonment a competent sentence. In NewSouth Wales the Fair Trading Act 1987 allows prisonsentences of up to three years for second orsubsequent convictions, as well as fines.

Victoria can seek prison sentences under some otherconsumer Acts. One of the penalties under theConsumer Credit (Victoria) Act 1995, for a person whooffers financial broking services after being disqualifiedas a finance broker, or does not comply withconditions set by the Business Licensing Authority, istwo years’ imprisonment. The Estate Agents Act 1980provides for a penalty of up to 10 years’ imprisonmentfor an agent that fraudulently transfers or does not payor appropriately account for money held in trust(section 91).

In addition, the Director of Consumer Affairs Victoria(or delegate) can commence criminal proceedings byfiling a charge with the Registrar of the MagistratesCourt of Victoria. Such charges could includesummary or indictable offences2 under the Crimes Act1958 (Vic), both of which can attract prisonsentences.3

The Crimes Act includes provisions that make it anoffence to dishonestly appropriate property belongingto another with the intention of permanentlydepriving them of that property (theft, section 74);obtain financial advantage by deception (section 82);engage in false accounting (section 83); falsifydocuments (section 83A); give or receive a false ormisleading receipt (section 178); or fraudulentlyinduce a person to invest money (section 191). All ofthese are activities in which rogue traders could beinvolved.

Box 6 (continued)

Consumer Affairs Victoria sought injunctions torestrain the Cellante group from employing thesesales techniques and to compensate an affectedconsumer. In 2004-05 the Horsham Magistrate’s Courtfound that the group had engaged in unconscionableconduct and misleading or deceptive conduct,granted injunctions restraining similar conduct, andawarded an affected consumer approximately $30,000in damages. The decision was upheld on appeal tothe Supreme Court. The consumer was awarded over$37,000 in damages, including interest.

Joseph CapriJoseph Capri was prosecuted by Consumer AffairsVictoria in September 2004 and convicted of buildingoffences giving rise to 30 charges, including trading asan unregistered builder, demanding excessive depositsand failing to deliver the services for which he hadbeen paid, engaging in misleading conduct, andtrading using a series of unregistered business names.

He was fined $49,000 on conviction and ordered topay $15,535 in compensation to consumers and$1,792 in legal costs to Consumer Affairs Victoria.

2 In general, summary offences are heard by the Magistrates Court, indictable offences are more serious offences heard by a judge and jury.3 The Director (or delegate) can file both summary and indictable charges but they can only conduct proceedings relating to offences heard

summarily. Indictable offences must be referred to the Director of Public Prosecutions.

The role of consumer policy tools > 17

There are, however, limits on the ability of the Director(or delegate) to conduct summary proceedings. TheDirector of Public Prosecutions may take over andconduct any proceedings in respect of any summaryand indictable offence (section 22 of the PublicProsecution Act 1994 (Vic)). Where an accused person ischarged with an indictable offence, capable of beingheard summarily, he or she may decline to accept thesummary jurisdiction, and the offence is then heard bya judge and jury. The Director (or delegate) would losecontrol of the proceedings, which must be referred tothe Director of Public Prosecutions at this stage. Thiswould be unusual, however: given the lower penaltiesusually attached to summary offences, an accusedwould not usually insist on a trial by judge and jury.

Finally, it is not clear how extensively provisions thatallowed for prison sentences under the Fair TradingAct would be used in Victoria. The evidentiaryrequirements of a criminal case would often make itimpractical and costly to seek redress for consumersand prevent ongoing damage by rogue traders throughcriminal prosecution, particularly given that theDirector of Consumer Affairs Victoria already has alimited ability to prosecute consumer-related offencesunder the Crimes Act, where prison sentences areavailable.

Powers to collect information and investigatecomplaintsFinally, the Fair Trading Act’s success in stopping roguetraders is affected by the regulator’s powers to monitorcompliance, detect the activities of rogues and collectevidence to prosecute them. These powers were alsoexpanded in the recent Fair Trading Act amendments,giving Consumer Affairs Victoria added powers to useadditional inspectors and require people to provideinformation and justify their actions.4

First, the Act provides for inspectors to investigatecomplaints and gives inspectors powers to collectevidence and question people (Part 10). The 2004amendments to the Fair Trading Act expanded thecategories of people that can be appointed asinspectors, including allowing Victoria to useinspectors appointed under fair trading legislation inother Australian states and territories. This increasesVictoria’s ability to cooperate on investigations withother jurisdictions.

Second, the Director can require people to provideinformation.

• Anyone can be required to provide information ordocuments to assist Consumer Affairs Victoria tomonitor compliance, even if it would incriminatethem (section 106HA).

• Anyone the Director believes can produceinformation on a suspected breach of the Act can berequired to provide information, documents orevidence, even if it would incriminate them (section106I). This allows the Director to conduct a hearingand require that evidence be provided under oath.

• On the Director’s request, publishers and telephonemarketers must produce the information they arerequired to retain under the Act (section 118).

The implications of providing such information andthe extent to which it can be used in later legalproceedings vary depending on circumstances. Evenwhen the information cannot be used in subsequentlegal proceedings it helps target future investigationsby informing the regulator about the scope of rogueactivity. Consumer Affairs Victoria served 156information notices in 2004-05.

Finally, the Director of Consumer Affairs Victoria canrequire people to justify their actions by substantiatingtheir claims about a product or service (section 106A)or showing cause why they should be allowed tocontinue carrying on business (section 106B). Ninesubstantiation notices were served in 2004-05.

Overall, because it is general legislation, spanning alltrade and commerce, the Fair Trading Act usually relieson standards (which specify the required behaviour),rather than rules (which define how behaviouralrequirements must be met). Standards are moreappropriate in legislation with a broad application, asdefining practical, effective rules would be impossible.They are also more flexible, ensuring that the lawautomatically covers new businesses or new forms ofunfair trading. It can be more difficult, however, tocollect evidence and demonstrate that a trader hasbreached a standard than to prove that a trader hasnot complied with a prescriptive rule.

While it is possible to debate the detail of some of theFair Trading Act provisions relating to informationcollection and investigation, these powers are relativelywide. Key areas (such as the power to obtaininformation to monitor compliance) have been usedto good effect and Consumer Affairs Victoria has beenproactive in taking action and cooperating with otheragencies, as in the case of Grove ConveyancingServices. Grove Conveyancing, a partnership providingconveyancing services in the Geelong area, collapsedafter allegations of misappropriation of funds, affectinga large number of consumers. To secure evidence toprotect consumer interests, Consumer Affairs Victoriaseized 13,318 files from the offices of GroveConveyancing Services under warrant. Victoria Policeseized a further 168 files. Consumer Affairs Victoriacatalogued the files, established an inquiry register,answered 396 enquiries, and returned 111 certificates

4 This is in addition to other sources of information, such as intelligence collected through consumer complaints and inquiries.

18 > The role of consumer policy tools

of title and other security documents found in theseized files to their lawful owners. Consumer AffairsVictoria identified specific transaction files to beforwarded to the Victorian Police for further action.Charges were issued against a proprietor of GroveConveyancing in November 2005, and at date ofpublication were before the Geelong Magistrate’sCourt.

As these provisions are relatively new, it is too early toconclude whether further amendments are needed.There may, however, be scope for other amendmentsto improve the effectiveness of the Fair Trading Act.For example section 83 of the Trade Practices Actallows findings of fact in one case to be used as primafacie evidence in subsequent cases.

In a proceeding against a person under section 82 or inan application under subsection 87(1A) for an orderagainst a person, a finding of any fact by a court madein proceedings under section 77, 80, 81, 86C or 86D, orfor an offence against a provision of Part VC, in whichthat person has been found to have contravened, or tohave been involved in a contravention of, a provision ofPart IV, IVA, IVB, V or VC is prima facie evidence ofthat fact and the finding may be proved by production ofa document under the seal of the court from which thefinding appears. (Trade Practices Act section 83)

Section 83 reduces the cost of prosecuting subsequentcases and reduces the regulator’s response time, as itdoes not need to wait until the cases for all claimantshave been finalised before it takes action against arogue trader. There is no equivalent provision inVictoria’s Fair Trading Act.

Often it is argued that industry specific regulation,such as licensing regimes, is needed to control roguetraders. Licensing, for example, can help stop roguesby controlling who can start a business, monitoringactivity in the industry and removing traders thatdon’t meet licensing conditions, from the industry.Many licensing schemes use a ‘fit and proper person’test to prohibit people with histories of exploitativebehaviour from obtaining licenses. In Victoria,approximately 40 Acts with licensing and registrationprovisions have a ‘fit and proper person’ test. About 20Acts with licensing and registration provisions alsohave conditions on the characters of associates to theapplicant.5

Licensing or registration schemes can also requireongoing reporting of the activities of the licensee andmaintenance of certain types of records, or give theregulator the power to request the provision ofinformation. Estate agents, introduction agents, travelagents, motor car traders, credit providers, secondhand dealers and pawnbrokers, and prostitutionservice providers must supply annual statements whenthey renew their licences or registrations. They are alsorequired to create and hold records on their activities.For example, motor car traders must record the detailsof the purchase and sale of each car in a dealings book(Motor Car Traders Act 1986 (Vic) section 35). Someschemes include other strategies to reduce the damagethat rogues cause consumers. For example, the MotorCar Traders Guarantee Fund may compensate consumerswho have been victims of rogue motor car traders.

Licensing or registration can assist enforcement. Thelicence or registration of a trader can be revoked if itengages in rogue activities and the regulation mayprovide additional mechanisms to pursue unlicensedor unregistered rogues operating in the industry.

5.2 Industry specific regulationincluding licensing

5 Derived from a search of the Victorian legislation database

The role of consumer policy tools > 19

The Business Licensing Authority can also imposeconditions on licences to protect the public interest.Such conditions can limit the damage caused bytraders that are suspected of being involved in rogueactivities or reduce the ability of individuals who havehistories of rogue activity being involved in licensedbusinesses. Conditions could include prohibiting aperson from having any role in a business or beingpresent on the business’s premises, or requiring thelicensee to provide additional information, undertakeadditional monitoring, set up a complaints handlingprocess or provide additional financial guarantees tolimit the risk of financial loss to consumers.

For those industries subject to licensing, such schemescan help deal with rogue activity. They can assist inidentifying and excluding rogues with records ofinappropriate behaviour before they enter licensedindustries, and identifying and taking action againstlicensed or unlicensed rogues operating in the industry.

The next question often posed is whether new licensingschemes should be implemented to deal with roguetraders in other industries. Such suggestions should betreated with caution because licensing schemes can becostly for government, the regulated industries andconsumers.

Licensing regulation requires government resources todevelop, implement and enforce the regime.6 It alsoimposes costs on all businesses, including ethicalbusinesses that are not the target of the regulation, butare still covered by its requirements. In some cases, itdisproportionately disadvantages honest businessesthat are fully compliant but are undercut by roguesthat have lower costs because they avoid compliance.The extent of these costs will depend on theconditions in individual licensing schemes.

Consumers are affected when the costs of businesscompliance and cost recovery charges are passed on inhigher prices. Consumers may be furtherdisadvantaged because of difficulty government hassetting conditions that exclude only rogue traders anddo not also limit new services that could expandconsumer choice.

In addition to these costs, licensing cannot eliminaterogue traders. While it significantly reduces the risk ofrogues getting through the licensing screen, it is notpossible to guarantee that no licensed operator engagesin rogue activity or that unlicensed rogues do notenter the industry. Industry specific regulation simplyprovides additional tools to target rogues. The effectivenessof any individual scheme depends on the provisions inthe regulation, the way it is administered and theresources and priority devoted to enforcement.

In industries where industry specific regulation alreadyaddresses other issues, it can help deal with rogueactivity. Given there are relatively few rogue traders inmost industries, however, the costs to legitimatebusinesses and consumers makes introducing industryspecific regulation simply to target a rogue traderproblem questionable – particularly given the scopeand powers in the Fair Trading Act (discussed insection 5.1). To the extent that industry specificregulation allows for stronger powers (for example, the inspection powers in some licensing schemes) itmay be possible to use the experience gained from thisregulation to improve the effectiveness of the FairTrading Act.

Sections 5.1 and 5.2 discussed policies that reduce thedamage rogue traders cause. Other strategies empowerconsumers to look after their own interests, byeducating and informing them about their generalrights or about rogue traders.

The more aware the community is about consumerrights the more discerning consumers will be. Theywill be better at detecting rogue traders andresponding quickly if they inadvertently engagebusinesses that are not delivering the goods or servicesthey expected, reducing the damage rogues can cause.Informed consumers are more likely to lodge inquiriesor complaints with consumer agencies, increasingagencies’ ability to identify and target problems.

5.3 Creating informed and awareconsumers

6 The cost met directly by government depends on the level of cost recovery from the regulated industry.

20 > The role of consumer policy tools

Consumer Affairs Victoria uses various strategies tohighlight rogue businesses, scams or industries that aresusceptible to rogue traders’ activities. The Director ofConsumer Affairs Victoria issues public warnings aboutunfair business practices and people who engage insuch practices under section 162A of the Fair TradingAct7 and other Acts, such as the Fundraising Appeals Act1998. At date of publication there were eleven tradersnamed on the Consumer Affairs Victoria website:

• Ronald Heelan Fredericks (aka Bon Levi) and LittleJoe Snacks

• Kevin John Sims (aka Simon Spain) and CentralCasting, Global Capital Casting, MM Promotionsand Little Stars Models

• Bevan Crowley, Ann Crowley, Hannah Crowley,Australasian Corporate Events (2004) Pty Ltd andEnews Publications Pty Ltd, and

• European Land Sales Partnership (aka EuropeanLand Sales Australia, ELS Australia and EuropeanLand Sales) and Stephen Cleeve.

• Gino Carmignani

• Australia Water Provisions

• Joseph Yelding (also known as Joe or Joey Yeldingoperating as Diamond Coat Roofing)

• Best Conferences Pty Ltd and Liam Crowley

• John Stewart, trading as Bitumen Driveways

• Christian Kalos (also known as Christopher Tsakalos)

• Victorian Emergency Relief Fund Inc. (CAV 2006, p. 1)

Adverse publicity orders (under section 153 of the FairTrading Act) and other orders, including publicityorders under section 158, have been imposed. Forexample, Denise Keating was ordered to publish astatement recognising that she was operating as anestate agent without a licence and correctingmisleading advertising. SJS Imports was convicted ofsupplying banned toys and cigarette lighters, whichposed significant safety hazards. It was ordered topublish a public warning in the Herald Sun detailingthe banned products it had sold and requestingconsumers to return or destroy those products. EncoreSystems, an internet trader, was ordered at an interimstage of proceedings against it to publish a notice onits website that informed visitors to the site that thecompany could not demand or accept payment forgoods or services until these had been delivered toconsumers.

Other initiatives also inform consumers. For example:

• Consumer Affairs Victoria’s Annual Report listsproblem traders where it has received a significantnumber of complaints or identified persistentproblems in relation to those traders

• Consumer Affairs Victoria’s website contains adatabase that describes different scams andbusinesses that have engaged in such scams

• The Little Black Book of Scams describes various scamsand how to avoid them8

• the Australasian Consumer Fraud Taskforcecoordinates an annual consumer informationcampaign (involving private sector organisations) tocoincide with Global Consumer Fraud PreventionMonth, and

• the Australian Securities and InvestmentsCommission website lists unlicensed overseasorganisations that pose as brokers or investmenthouses and try to sell investments, financial adviceor financial products by telephone.

If effective, information and education can benefitconsumers by stopping damage before it occurs. Suchstrategies are particularly important when it is difficultor time consuming to identify and deal with thetrader, for example, if the scam is instigated overseasusing the telephone or the internet to target Australianconsumers. While, in some cases, coordinatedinternational action is taken, this is not alwayspracticable or within Victoria’s control. ArmingVictorian consumers against scams is, therefore, oftenthe only viable alternative. Education strategies canalso target multiple rogue activities simultaneously,increasing the efficiency of the policy. There are,however, limitations to the effectiveness of consumerawareness campaigns:

• it is not possible to identify all rogue traders and scams

• it is difficult to inform all consumers who are likelyto come into contact with a particular rogue traderor scam, and

• new traders and scams are always emerging, socontinuous vigilance is necessary.

Therefore, while awareness raising is very important,it is only part of the solution. It is often a reactivestrategy and the time lags mean that the most astuterogues may have disappeared before consumers areaware of their activities. It can be difficult to targetthose who are most at risk, and to ensure they listen,understand and take note of the messages and thenretain and use that information when confronted bya rogue.

7 If it is in the public interest, the Director may publish a public statement or issue a public warning providing information on: the goods orservices that are unsatisfactory and the people supplying them; unfair business practices and the people engaged in them; and other mattersthat adversely affect consumers purchasing goods and services from suppliers.

8 This book was prepared by a Commonwealth, state and territory working group under the Ministerial Council on Consumer Affairs.

Other regulatory tools that target rogue traders > 21

Rogue traders can be prosecuted under otherlegislation not administered by Consumer AffairsVictoria. Other Victorian legislation includes taxationlegislation, and Commonwealth legislation includescompanies regulation, tax Acts and the Trade PracticesAct.

Many rogue traders breach Commonwealth and statetaxation laws, but Consumer Affairs Victoria cannot,on its own, pursue rogues through that legislation.Commonwealth companies regulation and the TradePractices Act can also be used to target the activity ofrogue traders. There may be scope for consideringamending these Acts to give state agencies more accessto remedies under that legislation.

Some rogue traders deliberately abuse the corporateform. They set up their affairs with the intention ofavoiding paying their debts and escaping detection.Some structure their businesses around several entities,holding most of their debts in an arm that has fewassets. When that arm fails, the organisation continuestrading but creditors do not have recall on the assetsheld in the other entities. Another technique is to rundown the assets of a business and accumulate debt,sending the business into receivership with thedeliberate intention of recommencing activitiesthrough another business, which uses some or all ofthe previous business’s assets and is controlled byparties related to the management or the directors ofthe previous entity. These may be called fraudulentphoenix companies.

As noted previously, phoenix companies are not illegalper se, but the actions of directors or other officers inthe company do risk breaching the Corporations Act2001 (Cwth). If directors and other officers fail to meettheir duties (such as the duty of good faith or theproper use of information or position), are involved ininsolvent trading, or enter into agreements ortransactions intended to reduce or prevent payingemployee entitlements, they are in breach ofcorporations law. If the phoenix company is alsoinvolved in tax avoidance it potentially breaches theCommonwealth Criminal Code.

The Corporations Act provides for people to bedisqualified from managing corporations:

• automatically if they are undischarged bankrupts, orconvicted of certain offences that are serious breachesof the Act or involve prison terms (section 206B)

• by the court,9 if they have contravened civil penaltyprovisions in the Act (section 206C)

• by the court, for up to 20 years, if they were, duringthe previous seven years, an officer of two or morecorporations at the time they failed and ‘themanner in which the corporation was managed waswholly or partly responsible for the corporationfailing’ (section 206D)

• by the court, if they repeatedly contravene the Act(section 206E), and

• by the Australian Securities and InvestmentCommission (ASIC), for up to five years, if theyhave managed two or more corporations in theprevious seven years at the time they failed and theliquidator has lodged reports under section 533 onthe corporation’s inability to pay unsecuredcreditors (section 206F).10

9 Includes the Federal Court, the Supreme Court of the state or territory, the Family Court or any other court appointed under proclamation.10 Under section 533(1) a liquidator must lodge a report with ASIC if it appears that an officer has been guilty of an offence, a person involved

in the company’s management has been negligent or breached a duty to the company, or the company may be unable to pay its unsecuredcreditors more than 50 cents in the dollar. (Joint Committee 2004, p. 138)

6Other regulatorytools that targetrogue traders

6.1 Companies regulation

22 > Other regulatory tools that target rogue traders

Only ASIC can make an application under section 206.Many of the submissions to the Joint Committee thatreviewed corporate insolvency laws were critical of thelevel of enforcement and the powers under the existinglegislation (Joint Committee 2004, pp. 142–143, 145and 148). The Committee made six recommendationsto improve the effectiveness of action against peoplethat deliberately abuse the corporate form (Box 7).

Box 7: Joint Committee recommendations

Recommendation 31While recognising the need to foster risk-taking andentrepreneurship, the Joint Committee concludedthat the legislative hurdles, under sections 206D and206F, to taking action against reckless and dishonestdirectors were too high. Under section 206F, ASIC canonly take action if the liquidator lodges a section 533report. As a fraudulent phoenix company has fewassets, creditors often choose to avoid the cost ofappointing a liquidator. Therefore, regardless of theactions of the directors, the preconditions for section206F would not be met.

The Committee recommends that ss 206D and 206Fshould not be subject to a requirement to have managedtwo or more failed corporations. They should permit acourt, or ASIC in its discretion, to disqualify a personfrom being a director where essentially two conditionsare met: the person is or has been a director of acompany which has failed (as defined in s 206D(2))and the person, as a director of the company (eithertaken alone or taken together with his/her conduct as adirector of any other company) makes him or her unfitto be concerned in the management of a company.

Recommendation 32To help identify companies engaged in phoenixactivity the Committee considered ways to improvecross-checking of business names on State BusinessNames Registries with the ASCOT database ofcompany names and ACNs.

The Committee recommends that the Government inassociation with the Council of Australian Governmentsreview the adequacy of the arrangements for thechecking of the business names of companies on StateBusiness Names Registries against the ASCOT databaseof company names and ACNs.

Currently, information from the state business namesregister is automatically uploaded onto ASIC’sdatabase.

Recommendation 33The Committee supported the earlierrecommendation of the Victorian Law ReformCommittee to ‘enable the courts to freeze assets of adirector or manager which are prima facie assets onwhich the corporation has a just claim’ (Law ReformCommittee 1994, p. xvii), to preserve those assetswhen there is a risk of fraudulent phoenix activity.

The Committee recommends that the Governmentconsider the proposal to create a statutory processanalogous to a Mareva injunction to enable the courts tofreeze assets of a director or manager which are primafacie assets on which the corporation has a just claim.

Recommendation 34The Committee argued that the procedures forestablishing a company should be tightened.

The Committee recommends that the Governmentreview the processes in place for registering a companywith a view to improving the measures for determiningthe bona fides of those applying to register a company.

Recommendation 35It concluded that ASIC could improve its processes forreceiving intelligence on potential phoenix operatorsfrom groups like trade unions.

The Committee recommends that ASIC considerestablishing a hot-line and guidelines for its operation inconjunction with strategically located employees for thepurpose of facilitating possible early detection of, andintervention to prevent the implementation of, illicitphoenix activities.

Recommendation 36A significant question is the extent to which membersof a corporate group should be jointly liable for the debtsof others in the group. The Committee concludedthat the Government should consider this issue further.

The Committee recommends that the insolvency relatedimplications and recommendations of the Companiesand Securities Advisory Committee’s Report onCorporate Groups should be examined by theGovernment and its response made available to theCommittee as soon as possible.

Source: Joint Committee 2004, Corporate Insolvency Laws: A stocktake

Other regulatory tools that target rogue traders > 23

In response to this and other reports on corporateinsolvency, the Australian Government released anexposure draft of the Corporations Amendment(Insolvency) Bill in November 2006 (the Treasury2006, p. 1). Addressing the issues identified by theJoint Committee would strengthen ASIC’s powers toact against fraudulent phoenix activity. Theserecommendations, however, still require ASIC to givepriority to identifying and pursuing the directors ofthese companies.

The Joint Committee also recognised the need forco-operation between ASIC and state and territorygovernments, particularly agencies involved inrevenue collection.

It is desirable for State and Commonwealth Governmentagencies who have responsibility for the collection ofrevenue or levies and ASIC to consult on their respectiveinterests, concerns and responsibilities in responding tophoenix company activities and coordinate their effortsincluding exchanging information. (Joint Committee2004, pp. 145–146)

ASIC has not actively pursued remedies under section206. In 2004, members of the Fair Trading OfficersAdvisory Committee recommended to the StandingCommittee of Consumer Affairs Officers that theCorporations Act be amended to enable the Directorsof Consumer Affairs/Fair Trading to have standing toapply for the relief under section 206C in appropriatecircumstances. Victoria continues to support theseproposed amendments.

While the provisions in the Trade Practices Act aresimilar to the Victorian Fair Trading Act, the remediesunder the Trade Practices Act have national (andextraterritorial) application, subject to constitutionallimitations. There may be advantages, in some cases,in prosecuting rogues under the Trade Practices Act,rather than state legislation. It is easier to enforce acourt order in another state, for example, if it wasmade under national legislation, than if it was madeunder Victorian legislation by a Victorian court (evenwith the extraterritorial application of the Fair TradingAct).

The Trade Practices Act enables the CommonwealthMinister for Consumer Affairs, the AustralianCompetition and Consumer Commission (ACCC) orany person to apply for injunctive relief (section 80).‘Any person’ would include the Victorian Minister forConsumer Affairs or the Director of Consumer AffairsVictoria. Unlike the Commonwealth Minister or theACCC, however, the Victorian Minister or the Directorwould have to give an undertaking as to damages ifthey made a section 80 application (section 80(6)).Such an undertaking is not required when the Directormakes an application under Victorian legislation.Section 86C provides for additional remedies and onlythe Commonwealth Minister or the ACCC can makean application under section 86C.

As with the proposed amendments to the CorporationsAct, Victoria supports the Fair Trading Officers AdvisoryCommittee proposal to amend the Trade Practices Actto protect state and territory fair trading and consumerprotection agencies against the requirement to give anundertaking as to damages when they seek to accessrelief under section 80 of the Act.

6.2 Trade Practices Act

Coordinated action > 25

Coordination prevents problems being experienced inseveral jurisdictions if traders move, and increases therange and effectiveness of enforcement tools. It helpsto detect problems more quickly and solve them moreeffectively. Experience with a telephone scam in theUnited Kingdom (Box 8) illustrates the effects of lackof coordination.

7Coordinated action

Box 8: Detection of a UK telephone scam

Chart 4.1 shows the progress of complaints about a widespread scam uncovered by the UK Department of Trade andIndustry. The telephone scam was instigated by a company trading under several names. Since the complaints were thinlyspread across the country, individual authorities did not picked up on the problem and a simple analysis of the data at weekseven (marked X) would have suggested the problem was decreasing. In fact, it was intensifying – diversifying into differentcompany names. Only after nine weeks (marked Y) did a local authority realise that it was a national problem.

Source: Hampton, P 2005, Reducing Administrative Burdens: Effective inspection andenforcement, pp. 72–73

26 > Coordinated action

Similarly, in Australia in 1997 the VictorianGovernment regulated introduction agents because ‘asmall but significant number of introduction agentshave engaged in widespread and ongoing unfairconduct resulting in both economic loss andemotional disturbance for many, and in particular,vulnerable consumers in this state’(Wade 1997, p.1631). The Act introduced licensing of introductionagents and placed requirements on their location,employees, behaviour, advertising and the collectionand use of information. It also regulated agreementswith clients and the information that must beprovided to clients.

The legislation successfully removed rogue operatorsfrom the Victorian industry. Because of a lack ofcoordination action between jurisdictions, however,the traders, who were of most concern in Victoria,moved to Queensland. The Queensland Parliamentrecognised this when it introduced its own regulationfor introduction agents in 2001.

After Victoria legislated to license introduction agents in1997 many Victorian agencies moved to Queensland toavoid the Victorian regime. It is probable, then, thatsome of these same agencies will again relocate to a statein which they are unregulated. So I will be continuing towarn my interstate colleagues and commending thislegislation to them. (Rose 2001, p. 2477)

Overall, the benefits of coordination betweenjurisdictions include:

• overcoming legal and logistical difficulties that oneagency may encounter when attempting toprosecute a rogue that is operating acrossjurisdictions

• reducing duplication of activity between agencies,increasing their combined capacity to target rogues

• allowing agencies to call on the knowledge,intelligence and expertise of others, makingenforcement more effective

• reducing the risk that rogues can avoid complianceby shifting their activities to another state orterritory, and

• sending clear messages to traders that a national,consistent and effective approach to enforcementwill be taken across the country.

These benefits were recognised in Australia whenjurisdictions signed the 2004 Joint ConsumerProtection Agreement and commenced developingprotocols for national cooperation in the enforcementof consumer legislation. The agreement is ‘animportant blueprint forward for national cooperationin enforcement and prosecution against traders whobreak the law’ (CAV 2004b, p. 1). States and territorieshave agreed to work together in areas like propertyinvestment advice, scam mail and product safety, andto take compliance action that benefits all Australianconsumers, not just those in the jurisdiction leadingthe prosecution. The Auzshare system also facilitatesinformation sharing among consumer agencies (Box 9).

Source: ACCC 2005b, Auzshare, p. 1

In Victoria rogue traders not only concern consumeraffairs agencies, but also other agencies withresponsibilities in industries where rogues operate,those responsible for revenue collection (given roguesoften avoid taxes and fees) and the police. Otheragencies may also administer regulation that could beused to prosecute rogue traders. Consumer AffairsVictoria needs to cooperate with these agencies if theirlegislation is the best vehicle for targeting the rogue.Rogues also operate internationally and there isconsiderable uncertainty about international lawenforcement.

Box 9: Auzshare

Auzshare is a new national fair trading notificationssystem. A database has been created to combat fraudulentpractices against consumers by improving informationsharing between participating agencies concerned withconsumer protection in Australia. The database isavailable to all offices of fair trading across Australia aswell as the ACCC. It allows these agencies to post alertsand complaints of a more serious nature in real time.These government agencies can use this information toinvestigate suspect companies and individuals, uncovernew scams and spot trends in fraud.

This information will improve the use of resources, asagencies previously had to contact each other individuallyto obtain the required complaint information. It will alsolead to more effective law enforcement by facilitating earlywarnings on emerging trends, quicker identification andallow for a coordinated response to unlawful activities bytraders.

Coordinated action > 27

Effective redress depends on both legal rights andmechanisms through which to obtain redress. To date,there is significant international uncertainty about whichcourt has jurisdiction to hear a cross-border dispute andwhich country's law will govern the resolution of adispute. (CAV 2004c, p. 25)

Even in the European Union, where inter-countryrelations are comparatively close, the ability of roguetraders to target regulatory gaps between countries isrecognised. The European Commission is activelytrying to address this problem.

The European Commission adopted today a proposal fora Directive on unfair business-to-consumer commercialpractices … which establishes a single, common, generalprohibition of unfair commercial practices distortingconsumers' economic behaviour. This single set ofcommon rules will replace the existing multiple volumesof national rules and court rulings on commercialpractices. This will give consumers the same protectionagainst sharp business practices and rogue traderswhether they buy from the shop around the corner orfrom a website in another Member State. (EU 2003, p. 1)

The OECD also recommended that:

Member countries should develop mechanisms for co-operation and information sharing between and amongtheir own consumer protection enforcement agencies andtheir other law enforcement authorities, for the purpose ofcombating fraudulent and deceptive commercialpractices.

Member countries should review their own domesticframeworks to identify obstacles to effective cross-borderco-operation in the enforcement of laws designed toprotect consumers against fraudulent and deceptivecommercial practices, and should consider changingdomestic frameworks, including, if appropriate, adoptingor amending national legislation to overcome thesebarriers. (OECD 2003, p. 12)

Strategies that assist coordination and cooperationcould include:

• Consistent approaches to regulation to minimisegaps and overlap – Australia’s general consumerlegislation is largely consistent, with a few keydifferences. Industry specific legislation is morediverse. Governments could assess the impact ofthese differences in priority areas and considerwhether greater consistency is possible anddesirable.

• Information sharing – Auzshare (box 9) and the newAustralian Consumer Fraud Prevention Taskforce,for example. The taskforce comprises 18government regulatory agencies and departmentsinvolved in protecting consumers against fraud andscams. These agencies work together to enhanceenforcement, coordinate information campaigns,share information and generate greater interest inresearch on consumer fraud and scams.

• Regulators’ forums – Regular meetings betweenregulators can encourage information exchange andidentify joint priorities. The Ministerial Council onConsumer Affairs and the Standing Committee ofOfficials of Consumer Affairs are active at thenational level. Victoria has a state regulators’ forumthat meets regularly to discuss priority state issues.

• Enforcement protocols – Jurisdictions have signed aJoint Consumer Protection Agreement and there arememoranda of understanding between someVictorian agencies. The Liquor Licensing Authorityand Victorian Police have a memorandum ofunderstanding to coordinate their roles in securingcompliance with, and enforcing, liquor regulation.

Cooperative strategies are important internationally,interstate and intrastate. While there are initiatives atall these levels, effective cooperation is hard to achieve.It is hindered by the difficulties of maintaining opencommunication, reconciling priorities among agencies,identifying the key people across agencies anddeveloping practical and effective processes andprotocols. More work and ongoing monitoring isneeded to improve the effectiveness of existingstrategies and target areas where additional strategiesare needed. In particular, Consumer Affairs Victoriacould play a greater role in combating fraud by roguetraders if it had closer partnerships with localgovernment and the Victorian Police.

Expanding the tools > 29

While Victoria uses a range of mechanisms to dealwith rogue traders, there are tools used overseas and inother policy contexts in Australia that could informfurther development of Victoria’s strategies. Innovativeapproaches often involve improved intelligence toidentify rogues and faster responses by the regulator.Some examples are discussed below.

Disruption techniques create barriers to contactbetween rogue traders and potential victims. Forexample, seizure and destruction of scam mail is usedto intercept scams before they reach Australianconsumers. In June 2005, 160,000 letters were seizedand destroyed as part of a ‘coordinated national sweepby Australia Post, Consumer Affairs Victoria and otherconsumer agencies’. (CAV 2005b, p. 2) These wereillegal ‘get rich quick’ chain letters that were part of amajor pyramid selling scam.

The United Kingdom considered disruption techniquesto combat rogue traders selling property repairs door-to-door, particularly in areas where many of theresidents were older and vulnerable people. Theylooked at banning cold calling for propertymaintenance and repairs, but instead used communitybased information campaigns to discourage coldcallers, including stickers that tell doorstep sellers theyare unwelcome. This solution reflected the balanceneeded between combating rogues effectively andother objectives, such as maintaining strongcompetition and treating legitimate traders fairly.

A cold calling ban would have clear advantages forenforcement (eg in not requiring complex evidence ofintent). But we recognise the difficulties and issuesassociated with legislating for a ban, including:

• justifying a criminal offence that would catch activitythat was not harmful along with the harmful

• how to avoid harm to legitimate business or potentiallycreating barriers to entry

• considering whether there was sufficient justificationfor making the offence arrestable, or for includingprison among the available penalties: but if not,whether the ban would provide the improvementlooked for in enforcement and deterrence

• how cold calling should be defined, and what wouldconstitute prior arrangement

• what the scope of property maintenance/repair shouldbe

• whether a ban might, at some point in the future, bein conflict with whatever emerges from negotiations onan Unfair Commercial Practices Directive.

Some (though not all) of these difficulties might beaddressed by alternatives that could be considered in aconsultation exercise (eg coverage, exemptions etc.). It isat present unclear whether the balance of advantagesand disadvantages argues for a ban on cold calling forproperty maintenance/repairs. (OFT 2004c, p. 5)

8Expandingthe tools

8.1 Disruption techniques

30 > Expanding the tools

A key problem in combating rogue traders is theirspeed and mobility, that is, their ability to causedamage and move on before the regulator can react.Trading Standards in the United Kingdom introducedthe ‘Doorstoppers’ campaign to combat this problem.The campaign involves consumer information andeducation combined with rapid response teams. Theseteams are on standby to go to people’s homes whileworkmen are still on site. The program is implementedon a regional basis. For example in West Yorkshire:

Trading Standards Service have introduced a number ofmeasures to combat doorstep crime. One of the mosteffective has been the rapid response protocol. The aim isto despatch Trading Standards Officers to a consumer'shome whilst the trader is still on site. The trader's workis examined and a fair price is negotiated. If the work isfound to be fraudulent then the trader is informed thatthey will not receive payment. If the trader objects, theyare advised how to pursue the matter through the smallclaims procedure – an option, they are unlikely to follow!At present officers have attended over 100 responses andbeen able to save vulnerable consumers approximately£35,000. (West Yorkshire Trading Standards Service2003/04, p. 6)

If the trader has left but is due to return, officers can beavailable at the consumer’s house at the time thetrader is expected.

Awareness campaigns usually focus on increasingconsumers’ knowledge of their rights and the identityand activities of rogue traders. This is not the onlyimportant issue. Government agencies’ awareness ofthe problem of rogue activity and traders’ awareness ofenforcement action against rogues also need to beraised.

Consumer agencies can improve their effectiveness ifother agencies know how rogue traders operate, howconsumer issues relate to their interests and the role ofconsumer laws and consumer agencies. Suchawareness improves intelligence gathering andinteragency coordination.

In addition, rogues can be deterred by creating abusiness environment that discourages roguebehaviour. Such an environment depends on tradersseeing rogue behaviour as unacceptable, discouragingtraders (such as those in financial difficulty) fromresorting to rogue tactics to solve their problems andencouraging honest traders to report rogues. Oneuseful strategy is to raise the regulatory agency’s profileand its successful enforcement activities. Activitiesmight include:

• blitzes or high profile campaigns againstproblematic rogue activities

• publicising successful prosecutions (this can impacttrader behaviour in similar industries as well)

• creating closer links with business organisations

• using industry organisations to advocate thebenefits of ethical trading

• liaising with suppliers of material, such as paint andbuilding products, which may supply industrieswhere rogue traders are active

• creating closer local links with agencies such as localgovernment and local police, and

• incorporating rogue trader issues into generalcommunication with traders, such as seminars orconferences.

8.2 Rapid response strategies 8.3 Raising awareness

Expanding the tools > 31

A critical issue for any effective strategy against roguetraders is good intelligence. The difficulties inidentifying rogue traders and collecting data on theiractivities is discussed in sections 2 and 3. Despite thesedifficulties the need to improve intelligence gatheringis recognised worldwide and many innovativesolutions are being considered.

• The Australian Communications and MediaAuthority is implementing a new spam reportingtool. SpamMatters is a plug-in to Microsoft Outlookand allows users to quickly and easily forward spamemails to the Authority.

Customers can use the software to forward spam theyhave received directly to the ACA's [now part of theAustralian Communications and Media Authority]forensics database system for collection, research,analysis and action.

The system also automatically extracts relevantinformation from the spam that may help the ACA totrack down spammers. This information can be used asevidence in court because the database also saves thespam message with the header and body intact.

The database system reduces the need for manual spaminvestigations and is able to process and analyse verylarge amounts of spam. (ACA 2005)

• The British Bankers' Association, the BuildingSocieties Association and the Trading StandardsInstitute signed a protocol that gives bank andbuilding society staff guidelines to follow if theyspot an older or vulnerable person trying towithdraw unusually large sums of cash.

Counter staff are urged to be vigilant and step in to helppeople they suspect may be on the brink of falling victimto a doorstep con and contact Trading Standards or thepolice for back up if necessary. (BBA 2004, p. 1)

• Police in Lincolnshire in the United Kingdom arecollecting information on bogus traders as part of aproject collating and distributing data on distractionburglary. (OFT 2004a, p. 101)

• In 2003 the United States Federal Trade Commissionconducted a national survey on identity theft. Thesurvey allowed it to identify the nature and extentof the problem. (FTC 2003, p. 1)

• In 2004 the United States Federal Trade Commissionconsidered but rejected, using financial rewards toencourage citizens to track, identify and reportspammers. (FTC 2004, p. 1)

8.4 Intelligence gathering

Choosing policy approaches > 33

In choosing policy approaches to deal with roguetraders three key issues should be recognised:

1. rogues form a minority in nearly all industries; insome industries there may be only a few roguetraders

2. regulation targeting rogues could affect thebehaviour of ethical businesses, and

3. there is no single strategy that can combat roguetraders, rather a combination of strategies isnecessary.

It is well recognised that regulation is needed tocombat the activities of rogue traders. Honesty is bothexpected by the community as a basic standard ofbehaviour and necessary to ensure that markets workeffectively.

Competition may not always be enough to protect eventhe reasonably careful purchaser from dishonest orunduly careless sales practices … we recognise a problemof ‘market failure’, such that the normal competitiveprocesses need to be supplemented by legislativeintervention to penalise the dishonest and undulycareless firm. (Victorian Consumer Affairs Council1983, p. 49)

The regulation chosen is important, however. Generalconsumer regulation usually specifies inappropriatebehaviour, such as the use of unfair contract terms,false and misleading advertising or unconscionableconduct. Such provisions have few costs for ethicalbusinesses. Other regulation is more prescriptive, itmay require disclosing information, obtaining alicence, keeping records or obtaining certainqualifications. Such regulation can impose costs on allbusinesses, not just rogues. In some situations, ethicalbusinesses may be at a greater disadvantage becausethey comply with the regulation and compete withrogues that avoid compliance. Debate about motortrader regulation in Victoria recognised these issuesand the need to balance controlling rogue traders withthe impact on small business (Lenders 2004, p. 1788).

The cost to business of complying with regulation ispassed on to consumers. While consumers benefitfrom regulation that decreases the activities of roguetraders, they will be disadvantaged by regulation thatraises the costs of the products or services they buy, orreduces their choice of products or services. Care isneeded to ensure that the obvious costs to consumerscaused by rogue traders are not removed only to bereplaced by less obvious costs, the costs of regulation.Regulatory approaches that directly target theproblematic behaviours of rogues, without affectingother traders, are most likely to reduce the rogue traderproblem without generating unintended costs orimpacts on consumers or businesses.

9Choosing policyapproaches

9.1 Regulatory costs for consumersand ethical traders

34 > Choosing policy approaches

The type of regulation chosen can discourage ethicaltraders from self regulating their behaviour.Braithwaite noted that some commentators argue thatyou should regulate for the worst case scenario because‘one case of knavery can have such disastrousconsequences’ (Braithwaite 1993, p. 84). He suggested,however, that regulators should:

take seriously the need to nurture business virtue …without being so naïve as to believe that we willaccomplish something by waving ethics texts in front ofthe glazed eyes of the most gruesome corporate criminals.(Braithwaite 1993, p. 84)

He argued that institutions that assume traders are notvirtuous destroy virtue and encourage dishonestbehaviour. He illustrated this using the example inBox 10.

Source: Braithwaite 1993, ‘Responsible BusinessRegulatory Institutions’, in Business Ethics and the LawCoady, CAJ and Sampford, CJG (eds), p. 85

Therefore, regulation that is highly intrusive andprescriptive can reduce the incentives for business toact ethically. A more flexible regulatory environmentbacked by strong powers to deal with rogues may bemore effective. Such an approach also freesgovernment resources to deal with rogues as it reducesthe need to regulate ethical businesses.

By their nature, rogue traders target loopholes inregulation and enforcement activities to avoiddetection and prosecution. A suite of strategies isneeded to address the problem from several anglessimultaneously. The challenge is to choose a packageof strategies that is effective and has benefits thatoutweigh its costs. The policy tools discussed insections 5 to 8 can target different aspects of the roguetrader problem. Because it is virtually impossible to geta comprehensive database on rogue traders a two-pronged approach is needed:

1. increasing the market’s resilience against rogues, and

2. identifying rogues and targeting action againstthem.

Resilient markets reduce the incentives for rogues toset up and the amount of money they can extract.Policies that increase market resilience could include:

• building consumer confidence so consumers aremore likely to stand up for their rights

• informing consumers about rogues and theiractivities so consumers can avoid rogue traders andmore readily identify and avoid scams, and

• informing traders so that industry cultures arehostile to rogues and their activities, and businessesare more likely to inform consumer agencies aboutrogues and their activities.

As it is not possible to eliminate rogue traders otherpolicies are also needed to identify rogues and actquickly. Quick identification minimises damage andreduces the rogue’s ability to avoid prosecution.It often requires coordinating the activities of differentagencies and levels of government.

9.2 The effect of regulation ontrader behaviour

Box 10: The effect of regulation on traders’incentives to behave ethically

The trouble with institutions which assume that people orfirms or corporate subcultures will not be virtuous is thatthey destroy virtue. Some agencies that regulate business,particularly American agencies, tend to do just this. I haveobserved the tragic little drama of virtue being destroyedmany times during my empirical research on businessregulation. The government inspector marches into aworkplace and starts making threats; citations are written;most critically, both the demeanour of the inspector andthe policy that stands behind that demeanourcommunicate the expectation that the manager on thereceiving end of the encounter is untrustworthy. Theregulator communicates the assumption that it is onlycompulsion, or only the bottom line, that will move themanager to submit to the policy of the law. But thisassumption is often wrong. The safety manager maydeeply care about the safety of her workers, and sheresents, bitterly resents, being treated as if she does notcare. This resentment can destroy her good faith, herwillingness to go an extra mile beyond what the inspectorasks her to do. Common sense and a wealth ofexperimental psychological research instruct us that whenhuman beings are compelled to do something theircommitment to doing it erodes. More precisely, commitmenterodes in comparison with a situation where theyvoluntarily choose to do that thing because they arepersuaded that it is the right thing to do.

9.3 Combining regulatorystrategies

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Rankin, G and Popkin, M 2004, Parent, Director andRelated Company Exposure, The Erosion of LimitedLiability – Extending the Reach of Liquidators, AllensArthur Robinson

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West Yorkshire Trading Standards Service 2003-04,Trading Standards Update, Winter, issue 30

Wade, Mrs (Attorney-General) 1997, Introduction AgentsBill, Second Reading, VicHansard (Assembly), 22 May,Melbourne

Consumer Affairs Victoria Reseach and Discussion Papers > 37

1. Consumer Education in Schools: Background ReportNovember 2003

2. What do we Mean by ‘Vulnerable’ and ‘Disadvantaged’Consumers? March 2004

3. Information Provision and Education StrategiesMarch 2006

4. Social Marketing and Consumer Policy March 2006

5. Designing Quality Rating Schemes for Service ProvidersMarch 2006

6. Regulating the Cost of Credit March 2006

7. Consumer Advocacy in Victoria March 2006

8. Choosing between general and industry-specificregulation November 2006

9. Using licensing to protect consumers’ interests,November 2006

10. Consumer Detriment in Victoria: a survey of itsnature, costs and implications October 2006

11. Stopping Rogue Traders November 2006

Consumer Affairs VictoriaResearch and DiscussionPapers

November 2006C-45-02-797

Consumer Affairs Victoria

Victorian Consumer & Business Centre113 Exhibition StreetMelbourne 3000Telephone 1300 55 81 81 (local call charge)Email consumer@justice.vic.gov.auWebsite www.consumer.vic.gov.au