Regulatory Regimes and Organised Crime: Report (html)

9. Considering the effect of the preferred strategies: will they create perverse incentives?

9.1 As the Victorian Guide to Regulation notes, it is important to consider how a preferred regulatory strategy will operate in practice.^[1] In seeking to address organised crime infiltration of an occupation or industry, one of the key matters that should be considered is whether a regulatory strategy may, in practice, create a perverse incentive for such infiltration. A regulatory strategy should not necessarily be rejected where such an incentive may exist. However, the strategy may require adjustment in order to reduce the incentive for infiltration, and/or regulators may need to monitor the occupation or industry for the exploitation of these incentives by organised crime groups.

Fees, levies and other charges

9.2 A regulatory regime may impose fees, levies and other charges in connection with licences and the business practices of occupation/industry members (for example, in the waste management industry, levies must be paid when disposing of hazardous waste).^[2]

9.3 These types of charges must be carefully managed so as not to create an incentive for organised crime infiltration. Significant regulatory charges may encourage organised crime groups to infiltrate an occupation or industry and unfairly undercut market prices through regulatory non-compliance. For example, in the waste management industry, people may seek to evade paying the charges associated with lawful waste disposal by dumping material in unauthorised places. This would allow such operators to offer less expensive waste management services than legitimate operators.^[3]

9.4 Significant regulatory charges may also have the effect of making legitimate business operators and employees more vulnerable to corruption or exploitation by organised crime groups. Where the profitability of an occupation or industry is not sufficient to absorb significant regulatory charges, business operators may be more willing to participate in unscrupulous or unlawful activity in order to improve the profitability of a business.^[4]

9.5 At the same time, setting regulatory charges at a relatively high level may reduce the risk of organised crime infiltration, by increasing barriers to entry. The Commission was told that in several industries, low barriers to entry create a vulnerability to organised crime infiltration.^[5] Conceivably, significant regulatory charges and other financial commitments may also deter an existing business operator from allowing organised crime infiltration of their business, if there is a risk that these financial investments will be lost if infiltration is detected.

9.6 Accordingly, in setting regulatory charges, policy makers should seek to limit perverse incentives for organised crime infiltration.

Restrictions on competition

9.7 Any restrictions on competition under a regulatory regime should also be carefully managed in order to avoid or reduce incentives for organised crime infiltration.

9.8 A regulatory strategy may inadvertently encourage infiltration if competition is unduly restricted. For example, a licensing scheme may allow only a limited number of licences to be issued, or may involve imprecise assessments of probity and suitability that result in the exclusion of legitimate applicants. Organised crime groups may be attracted to occupations and industries with relatively little competition due to the potential for higher profits in markets with few competitors. In addition, a low level of competition may make it easier for organised crime groups to extort or intimidate existing occupation/industry participants in order to increase market share or even obtain control over a market.^[6]

9.9 An unduly restrictive licensing scheme may also compel otherwise lawful business operators and employees to enter the unlicensed sector of an occupation or industry.^[7] In turn, this may create conditions that facilitate organised crime infiltration, because unlicensed operators/employees may be reluctant to report any suspicions they have about organised crime infiltration for fear of bringing themselves to the regulator’s attention. For example, Vixen Collective noted that sex workers who are not compliant with the regulatory regime for the sex work industry are reluctant to report instances of organised crime infiltration to authorities for fear of legal action.^[8]

9.10 Further, if entry into an occupation or industry is unduly restricted by a licensing scheme, it may be difficult to sell an existing business to a legitimate operator. The Professional Tattooing Association of Australia (PTAA) stated that licensing requirements and costs in New South Wales and Queensland have made it difficult to sell existing tattoo businesses.^[9] In these circumstances, a financially strained business owner may be tempted to sell to an unscrupulous operator who is prepared to operate without a licence.

9.11 Any restrictions on competition under a regulatory regime may be justified for policy reasons other than the prevention of organised crime infiltration. For example, it may be necessary to restrict the number of licences issued in an occupation or industry in order to maintain the viability of natural resources (restrictions on commercial fishing licences appear to be a particular example of this). Where restrictions on competition are justified for these other policy reasons but may nonetheless create an incentive for organised crime infiltration, regulators should be alert to the possibility of such infiltration and monitor the occupation/industry accordingly.

1. Department of Treasury and Finance, Victorian Guide to Regulation (December 2014) 30.

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2. Environment Protection Act 1970 (Vic) s 50S, sch E.

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3. Consultation 2 (Roundtable 1).

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4. Ibid.

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5. Ibid.

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6. Consultation 10 (Victorian Automobile Chamber of Commerce).

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7. Consultation 2 (Roundtable 1).

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8. Submission 19 (Vixen Collective).

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9. Consultation 5 (Professional Tattooing Association of Australia).

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