Questions presented to APRA (July 5th 2012)

Minister Bill Shorten said these questions were very important and gave them to Treasury to answer. Bill Shorten informed VOFF that the answers will be provided by August 2012. It is now April 2013 and we are still waiting.

1. What were APRA’s regulatory checks, investigations and findings prior to approving operating licenses to Trio Capital and its directors and trustees, and more specifically the Astarra Strategic Fund in relation to its intended investment strategy, investment structure, liquidity levels and process for redemptions? When was this carried out, and by whom exactly, and what checklists were utilised?

2. Did APRA understand that Trio Capital / Astarra Strategic Fund was essentially a ‘fund of hedge funds’ at the time prior to approved licenses being issued, and that its primary intent was to utilise offshore 3rd party fund managers? If not, why was this not understood by APRA?

3. If APRA and ASIC have no jurisdiction to follow the trail of ‘fund of fund’ types, then they need to be graded as potential high risk and due warnings need to be mandatory information made available to investors. Why does APRA and ASIC not issue this alert?

4. Why is there so little transparency in the regulatory oversight of hedge funds, specifically ‘fund of fund’ types?

5. Prior to approving these licenses, why did APRA not seek out and request Trio Capitals / Astarra Strategic Fund list of underlying assets in these 3rd party hedge funds, and demonstrable proof of the valuations of those assets?

6. The Federal Government publishes documents relating to operating a self managed super fund and it says in part “you need to make sure all investment decisions are made according to the investment strategy of your fund”. Those documents also clearly state the consequences for non compliance, and this can include prosecution. However, if SMSF’s invest in APRA, ASIC and ATO approved funds where those same regulatory authorities have not thoroughly checked where, what type, proof of valuation and liquidity of offshore or 3rd party investments which is fundamental to SMSF’s making ‘informed’ investment decisions, why should SMSF’s be held to account and accept losses incurred by fraud and deception with no recourse for recovery against those same regulatory authorities for poor oversight, or against insurance provisions?

7. Why were investors not advised that ANZ had stood down as trustee and the reasons for it, so that investors could make informed decisions regarding continuing to invest or seek redemption if their individual risk profile changed as a result?

8. APRA & ASIC gave the green light for industry, retail and self managed super funds, plus direct investors to invest in Trio Capital. Trio Capital was not some rogue fund not covered by the Australian regulatory framework.  The Superannuation Safety Amendment Act 2004 was implemented to improve the following:

a. Trustees were required to be licensed by APRA by June 2006 if they wished to remain trustees of APRA regulated superannuation entities

b. A mandatory risk management framework was introduced for both the trustee and funds under trusteeship

c. New operating standards covering fitness and proprietary, adequacy of resourcing and outsourcing 

9. APRA carried out 5 prudential reviews of Trio Capital from 2004 to 2009. All the investor types would have assumed that APRA had carried this out effectively, thoroughly and competently including enforcing the requirements of the SSA Act 2004. VOFF demand APRA explain with these major changes to the prudential supervision regime via Superannuation Safety Amendment Act 2004, why did it still fail to detect fraud or suspicious behaviour by Trio Capital?

10. In 2005 APRA forced Shaun Richard and others from the board of Trio Capital because of alleged conflict of interest arising from his roles as both owner and investment manager for the fund." (Ref: SMH article '"Raised Concern" on hedge funds by Stuart Washington July 5, 2011). This appears to suggest that Mr Richard and others did not know the regulations surrounding ownership and management of a fund? Why did this not trigger a deeper investigation by APRA at this point? Were they in breach of Corporations Law and if so, why did APRA not act?       

11. VOFF demand APRA explain why it believed that they were dealing with incompetence and not fraud?

12. VOFF demand APRA explain that if it believed incompetence was involved and not fraud, why did it and the Trio Capital managed investment scheme regulator ASIC not act immediately on behalf of all Trio Capital investors to address that incompetence? If APRA and ASIC believe that it did, then VOFF request details be provided to demonstrate that they did. 

13. VOFF demand APRA explain that if incompetence was involved, why did it not enforce compliance by Trio Capitals Directors under various legislation and regulatory requirements?

14. VOFF demand APRA explain why it failed to communicate to ASIC and investors it’s upgraded risk rating of Trio Capitals after finding valuation irregularities? Why the several month delay in informing the MIS regulator ASIC?

15. When APRA changed and upgraded the risk profile of Trio Capital / Astarra Strategic Fund, when were ASIC and the ATO advised? Why is it that investors were not promptly informed so that those same investors could make informed decisions regarding continuing to invest or seek redemption if their individual risk profile changed as a result?

16. VOFF demand APRA explain why it would not think that the time delay wouldn’t be used by the fraudsters to siphon off more funds and or cover their tracks? 

17. VOFF demand that when the irregularities were found, why did APRA or ASIC not force Trio Capital to immediately advise investors that there were no valuations or a methodology to do so? 

18. VOFF demand APRA explain why self managed investors are singled out and discriminated against as having the responsibility for scrutinising fund details? Why did it not include industry and retail investors and their so called professional advisors as having this same responsibility?

19. APRA states that they take a risk based approach, and regularly analyse the financial condition of institutions and reviewing their risk management’. In 2004 / 2005, when it was discovered that there was poor governance and unit valuation problems with Trio Capital (source??) and later in 2008 when APRA discovered valuation methodology problems, VOFF ask the following:

a. Where is the evidence that APRA carried out a risk based approach in investigating Trio?

b. Where is the evidence that APRA, when having the Trio Capital Directors replaced as early as 2005, checked the existence of the assets, their locations, valuation and valuation methodology? 

c. Did APRA have follow up checks to ensure their existence?

d. Were ASIC informed? If not, why not? Why was there such a long delay?

e. Why was a notice not sent to investors, or their advisors of these irregularities? 

f. Regardless of whether incompetence or the suspicion of fraud, doesn’t APRA believe that it should be regularly analysing the financial condition of institutions and reviewing their risk management, that they should have acted on behalf of the best interests of all investors? 

20. At the PJC hearing on April 4th 2012, APRA stated that they had other higher priorities than the Trio Capital matter. For what reason is this matter not one of APRA’s highest priorities given the serious nature of the allegations of poor regulatory oversight provided by APRA? Why is this so, and why would APRA not find the security of mum and dad investors their top priority?

21. Further, upon application and election to operate as a self managed super fund, APRA issues notification stating that the "self managed superannuation fund is now a regulated superannuation fund under the Superannuation Industry Act 1993." APRA however, constantly states that slef managed super is not APRA regulated. This is a contradiction to the letter previously referred to. In light of this contradiction, APRA is contributing to misinformation regarding self managed super and how it is regulated. What is APRA’s response on this?

22. VOFF demand APRA explain why it believes that it is up to self managed fund trustees and their planners to scrutinise fund details? Why did it single our self managed investors and not include so called professional advisors of industry funds?

23. Why did APRA & ASIC not act with more diligence and haste when valuation irregularities as early as 2005 and again in n August 2008? Why were investors and their  financial advisers not promptly provided information or updates regarding this matter, noting that it was exposed as a scam by Bronte Capital blogger John Hempton who raised the alarm in September 2009?

24. More specifically, why is there no framework to verify the legitimacy and valuation of 3rd party investment managers to check whether the Australian Fund Manager is delivering to its intended strategy, risk profile and liquidity guidelines? 

25. Had there been more substantive checks carried out by APRA, the use of tax havens such as the Caribbean or the Cayman Islands could have raised the alarm regarding the legitimacy of 3rd party investments or the intended use of investor funds. In future, will APRA upon identifying the use of tax havens inform and communicate with investors, so that investors can assess the risk it may pose to their investment strategy?

26. High risk zones around the world need an appropriate category so the investor is clearly presented with the warnings. What is APRA’s response on this?

27. SMSF are continually informed, particularly by the Minister responsible Bill Shorten, that SMSF’s are not APRA regulated funds. What is the process by which APRA upon approving licenses to entities like Trio Capital passes on responsibility and oversight to the ATO? And what is that regulatory process from that point and how does APRA, ASIC & the ATO interact to ensure proper oversight and protection is provided to investors?    

28. Note: Although the ATO hold the responsibility for ‘regulating’ SMSFs - however, to start and run a superannuation fund requires ASIC and APRA to issue licenses, and execute their role in the superannuation industry as they are required under legislation. Saying the ATO is responsible for a SMSF functioning and to eliminate ASIC and APRA involvement is near impossible under the present structures. The superannuation industry would need a complete overall if SMSF investors relied solely on the ATO. Until that happens, the roles between the APRA, ASIC and ATO need to be understood more clearly by both the investor and industry and the opportunistic use of passing the blame needs to be prevented.

29. A more honest description of APRA’s role is thus:

“Trio Capital was approved by APRA and licensed to operate as a superannuation fund trustee. ASIC regulates and monitors managed investment schemes, which included the Trio Capital MISs. Once approved and subject to meeting regular prudential review requirements, we allow the likes of Trio Capital to operate within the Australian financial system for investors of all types to invest in”.

Questions of ASIC

At the same meeting with Minister Bill Shorten (July 5th 2012) these questions to ASIC were presented and the Minister assured VOFF two weeks later that the questions are taken seriously and answers will be ready by August 2012. 

At the Corporations and Financial Services Oversight Committee hearing on Friday 22nd June, Mr Medcraft and his colleagues made a number of comments on behalf of ASIC. VOFF raises questions in relation to this, specifically:

1. Does APRA confirm that Trio Capital came to the attention of ASIC in mid 2008?

2. Was this in any way related to APRA’s prudential reviews or findings?

3. What did ASIC do from mid 2008 in relation to Trio Capital?

4. Did ASIC receive correspondence from an Adelaide financial planner in June 2009 in relation to Trio Capital, and if so, why did it not immediately trigger an urgent investigation into Trio Capital?

5. If Trio Capital came to the attention of ASIC in mid 2008, how come it did not react until John Hempton raised the alarm in mid September 2009?

6. At the Hearing, ASIC raised the fact that communication with APRA was not as it could be, and had already implemented some remedial actions to improve it. This is evidence that communication inadequacies failures between ASIC and APRA and vis versa contributed to the fraud being carried out, does it not?

7. At the hearing, ASIC reported that it is now building a stronger skill set, particularly in relation to investment banking and fund management. Is this not evidence that the skill set was not sufficient enough to detect and act against organised crime infiltrating the part of regulatory oversight ASIC is responsible for?

8. Upon questioning regarding sufficient resourcing from the Oversight committee, ASIC reported that it does the best with what we’ve got. Is this not evidence that the skill set and resource levels was not sufficient  enough to detect and act against organised crime infiltrating the part of regulation oversight ASIC is responsible for?

9. APRA deputy chairman Ross Jones said to a recent Senate Estimates hearing “….that the fraud did not occur in an APRA regulated entity, but in an offshore hedge fund, beyond the reach of Australia’s regulators”. APRA say that they can’t reach offshore hedge funds. ASIC say they are proactively surveilling the hedge fund sector!! VOFF believe this is yet another case of the left hand not knowing what the right hand is doing. Who is safeguarding Australian investor funds?

10. Under section 1 of the ASIC Act, ASIC is charged with a statutory responsibility to perform its functions and to exercise its powers so as to promote the confident and informed participation of investors and consumers in the financial system. VOFF demand ASIC explain how it fulfilled its responsibility under the ASIC Act to Trio Capital investors.

11. Rather, ASIC seem intent to recommend that self managed investors should sign a written declaration that they have no protection against theft or fraud, as ASIC and APRA seem powerless to prevent it. Why has ASIC put up the white flag?

12. What information is ASIC holding on a subsidiary entity called “GCSL”. Investors request that this information be made freely available.

13. ASIC chairman Greg Medcraft recent statements that that self managed funds should sign a written acknowledgement that they are not covered for fraud or theft. This is effectively stating to 770,000 SMSF’s with over $400B in investments “ASIC are indemnified against our own negligence if we fail in our responsibilities to protect your investments”.

14. ASIC claimed at the recent Senate Estimates hearing (source??) that they await a response from the Government prior to before they implement improvements. However, ASIC are also quoted on the ABC AM program (30 May 2012) that following the collapse of Trio, ASIC has been taking action to enhance it’s processes and further improve the financial system. These changes include measures to strengthen financial requirements for financial services licencees, forcing the industry to have better investor disclosure, especially for hedge funds, and continuing our proactive surveillance of financial advisors and the hedge fund sector. This is a contradiction to the comments made to the Senate Estimates committee. VOFF enquire as to the which is the real position?

Questions of ATO

In the case of Commonwealth Director of Public Prosecutions v Hart [2010] QDC 457 (30 November 2010) the publicly available details of the investigations by the ATO & AFP in the early 2000's, which formed the basis for this prosecution, reflect that messrs Flader & Sutherland and a company named Zetland had come to the notice of investigators around the time Tolhurst Funds Management was procured in 2003. 

However, there was no mention of this case in the Trio Capital Inquiry report, despite several potential openings, including at pg 109: Research houses and fraud detection

Para 5.71 An obvious question arising from the Trio case is whether the fraud could have been detected earlier. …

Perusal of the Hart case material suggests that the ATO/AFP investigators knew that relevant individuals/entities in Hong Kong had helped to facilitate tax fraud in Australia during the early 2000’s. The heads of both the ATO & AFP ought to have been called upon to explain what action, if any, their organisations took at the time in relation to the ongoing potential risks posed to Australians by these offshore schemers.

Interestingly, the Inquiry report states at pg 127: SMSF’s and the role of the ATO

Para 7.19 … Given this remit, the ATO is indifferent to the risks of fraud and theft to which SMSF investors are exposed. It is not its responsibility to minimize these risks.

BUT, it is undoubtedly the ATO’s responsibility to ‘protect the revenue’ – that is, funds raised by the government. It appears that the government has been forced, as a result of the Trio fraud, to advance about $55m as compensation for some of the effected victims and even if some or all of this amount is eventually repaid via the super fund levy, ‘the revenue’ is still going to be adversely impacted somewhere along the line.

Further, the report states at pg 144:  AUSTRAC

8.21 AUSTRAC … collects and analyses financial information provided by regulated entities through financial transaction reports. This information is disseminated … to assist in the investigation and prosecution of serious criminal activity including … organised crime and tax evasion.

A further extract from the Inquiry report, at pg 145:


Para 8.23 The committee did not receive a submission, or take direct evidence from AUSTRAC. It does appear, however, that AUSTRAC was not given any significant information from the various gatekeepers alerting it to suspicious activity in Trio Capital. ...

VOFF therefore demand ATO answer the following:

1. What did regulators & investigative agencies, including the ATO, know & when did they know it? Or, perhaps more to the point, when should they have known it?

2. Were relevant Austrac reports available to the ATO regarding these international tax haven transactions?

3. If so, when did they arise?

4. How were they monitored?

5. Are there any automated or manual alert mechanisms, to highlight especially significant transactions?

6. Were there any such alerts generated in relation to these matters?

7. When?

8. If so, what was done?

9. If there were alerts but nothing was done, why not?

10. Is the ATO legally entitled/empowered to proactively review of Austrac information, to detect potential tax evaders?

11. If not, why not?

12. If so, have they been devoting sufficient resources to this function?

13. If not, why not & have staff complained about it?

14. Could this debacle have been detected/prevented or reduced by prudent proactive review of Austrac material?

15. Who is responsible?

16. Were relevant Austrac reports available to the ATO regarding these international tax haven transactions?  

17. If so, when did they arise?

18. How were they monitored?

19. Are there any automated or manual alert mechanisms, to highlight especially significant transactions?

20. Were there any such alerts generated in relation to these matters?

21. When?

22. If so, what was done?

23. If there were alerts but nothing was done, why not?

24. Is the ATO legally entitled/empowered to proactively review of Austrac information, to detect potential tax evaders? 

25. If not, why not?

26. If so, have they been devoting sufficient resources to this function?

27. If not, why not & have staff complained about it?

28. Could this debacle have been detected/prevented or reduced by prudent proactive review of Austrac material?

29. Who is responsible?

30. Why didn't the Inquiry ask AUSTRAC for a submission?

We finish on the following quote from Senator Nick Sherry to APRA:

“I ask you to take it on notice to take these issues up with both the ATO and with ASIC, because I have been at a lot of committee hearings over the last 20 years and this issue has come up time and time again, and time and time again…..literally hundreds of people who are not compensable in the event of theft and fraud in the SMSF sector.

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