Failed markets and culturopathy

Details

This page addresses the extent of the culturopathy problem in the wider marketplace in order to counter arguments that what I have described so far is an exception and not the norm.  It shows that in every sector where there is any vulnerability, whether in the funding, in the employees or in the customer, sooner or later a few will seize the opportunity to exploit this and that competitors will follow.  If it is essential to do so to maintain profitability, then most if not all will follow.

This page illustrates just how extensive this is, and how the most trusted companies and the most credible business leaders can be victins to it.

The central question this page asks is:

"If almost every other vulnerable sector has been so ruthlessly exploited, and it has been so difficult to identify and determine its extent, then what is the liklihood that aged care has escaped given the number of red flag scandals and reports that suggest that it is not delivering the care it should and that many are harmed?" 

I am not asking anyone to read all the material on this page, but it is here to show beyond any doubt just how extensive the problem of culturopathy actually is and the patterns of behaviour that characterise it.  Just scan through it and look at the illustrative examples.

We can use the term 'culturopathic' to describe any culture that results in harm. The great ideologies of the 20th century provide many examples. Nazism, Apartheid, Communism in Russia and China, North Vietnam and many more.  My concern is with its development on a smaller scale within vulnerable sectors and particularly in markets. This page is simply to illustrate how extensive the problem is across the marketplace and give some more illustrative examples.

When there are unaddressed weaknesses in any marketplace, the incentives and pressures in the system very commonly leads to the development of patterns of thinking that will allow the weakness to be exploited for commercial advantage. When this affects commodities and all we do is pay more for goods we can probably live with it.  When we see examples where fraud has resulted in our paying too much for something we might be happy to accept that as collateral damage but it is still worth looking at how it happened.

When a culturopathy targets and cannibalises vulnerable citizens to the extent that they are seriously harmed then, in a civil society, it is time to stop and think and then do something definitive about it.  Simply regulating, prosecuting and punishing is not going to properly address the issues.  When it is endemic and ongoing then the manner in which the market system is structured and operates needs attention.

Typically, patterns of thought develop which make the unethical or even illegal conduct acceptable or even desirable. On the web page Culturopathy: A for-profit example I gave a striking example from health care to illustrate what happens and tried to explain the psychological processes involved. As indicated in that example, those involved can be indignant and angry and even after a criminal conviction, they will continue to believe and then re-offend.

This case is not an exception.  Similar sorts of behaviour are the norm when an unstructured marketplace has vulnerabilities.  Our own David Malouf in his 1998 ABC Boyer lectures was positive about the Australian entrepreneural heritage.  He described it as siezing the main chance and the weakness of others. I doubt he was thinking about health and aged care when he wrote this. This readily leads to a culturopathy.

Typically, there will be a wide disparity between the way things are seen and understood by those embracing the culturopathic ideas when compared with those outside the culturopathy including its victims.  Those involved in the culturopathic thinking develop a lexicon and a set of ideas that make this legitimate for them.  In moments of lucidity (what Sartre calls "abrupt awakenings to cynicism") they realise what is happening.  They manage the conflict by joking cynically about it.

The first 2 examples illustrate this particularly well.

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Examples: Repeat offenders

Examples: Repeat offenders

An older example from Australia and another from the USA are representative.  They illustrate the nature of culturopathy, how it persists and how extensive it can be.  We see similar patterns of behaviour to those seen on the previous page.  Both illustrate the problem of repeat offenders.

Example: Mayne Nickless

The giant trucking company Mayne Nickless is a revealing example. It was the driving force in a price fixing cartel with other major trucking companies for probably over 20 years. Smaller competitors were priced out of the market and failed. Prices for transporting goods were pushed up and Mayne became a giant. The other companies accepted what they had done and pleaded guilty but Mayne was in angry denial. In 1994 it was finally forced to accept a large fine. The words used to clothe what it was doing and persuade its management that what it was doing was legitimate are interesting.

It is clear from their anger and assertiveness that Mayne executives did not think that they had done anything wrong. They had clothed it all in words with nice associations and created an illusion which they believed. The words were substituted in their minds for what they were doing.

"MAYNE Nickless Ltd chairman, Mr Ixxx Wxxxxx, lashed out at the Trade Practices Commission yesterday, saying the company would vigorously contest all allegations made against it."

Source: MAYNE CHIEF HITS TPC ALLEGATIONS, Australian Financial Review 11 Mar 1992

"We have never seen such a case of blatant defiance of the law and such a massive ripping off of companies." ----- "People are shocked by the extent of it -- the systematic, high level, widespread way it was done" ---- "the most blatant and extensive market-rigging arrangement the TPC had come across in its 20 year history" ----- "he had not heard one word of apology to their customers from any of them."

Source: Professor Fels, chairman of the Trades Practices Commission after Mayne Nickless $7.7 million guilty plea and acceptance of court imposed injunctions in 1994.

The press reported that the evidence was "electrifying". Executives spoke of "Orderly marketing is a feature of how we do business in Australia". The fraudulent arrangements were referred to as an "orderly marketing arrangement", "the peace" and "detente".

Source: "The Arrangement" - The Australian, by Sally Jackson, 7 Dec 1994

Without the cartel trucking was no longer profitable so Mayne switched to healthcare and became Australia’s largest hospital company. Only 8 years later in 2002 it started exploiting the vulnerability of the patients by cherry picking (admitting patients with conditions that were profitable and ignoring those that were not). Doctors revolted and took their patients elsewhere almost bankrupting the company. The company then broke up selling the different parts of its health care empire into the market.

But this was only the first of a succession of price fixing scandals in Australia.  We saw them in the cement industry in the 1990s with Boral and Pioneer, and in the packaging industry in the 2000s. Richard Pratt's company Visy and Amcor price fixing might have gone on for years if it had "not only came to light as by-product of a separate legal action" but then have a whistleblower come forward. 

Example: Wall Street

The giant financial institutions on Wall Street, the centre of the financial world in the USA, should be the most trusted in the world. But Wall street has been the centre of dysfunctional practices and recurrent scandals throughout the 20th century. Multiple companies were involved in another round of startling scandals in the first few years of the 21st.

I studied this concentrating on Citigroup’s multiple scandals because its Asian private equity arm purchased Mayne's hospitals in 2003 and then later bought our largest private nursing home company before selling it to INTFPCompanyB. I lodged objections to Citigroup's purchase of both on probity grounds. In both instances the ownership was brief as the businesses were “turned around” and then sold making a tidy profit.

After the scandals of the great depression in the 1930’s congress had legislated to limit what companies could own so as to avoid the conflicts of interest that had given rise to early scandals. But by the 1990s free market theory saw this as unnecessary interference with the free market. The companies that wanted to merge to form Citigroup in 1998 had considerable political influence.  The legislation was repealed in order to allow the merger.

Only 4 years later Citigroup was a leading participant in the scam that precipitated the Dotcom and Technology bubbles. Many lost their life savings. Multiple companies had seized the opportunity to capitalise on this new loophole and exploit the vulnerability of the gullible investors who came to them for advice. There were multiple massive scams and Citigroup was directly or indirectly involved in most of them.  The 1930s legislation would probably have prevented this.

William Galvin, the attorney general of Massachusetts and the state's chief securities regulator, said that the investigation of brokerage firms had shed light on dubious practices. "We're pulling back the curtain on Wall Street," he said. "The evidence that is beginning to emerge suggests that the brokerage industry in general has had a very reckless attitude toward investors. The pattern seems to be one of bad faith, where brokers and brokerage firms are almost laughing at the investing public."

Source: Regulators Find More Red Flags In Another Analyst's Optimism The New York Times September 12, 2002

 At firm after firm, according to prosecutors, analysts wittingly duped investors to curry favor with corporate clients.

"These cases reflect a sad chapter in the history of American business -- a chapter in which those who reaped enormous benefits based on the trust of investors profoundly betrayed that trust," said William H. Donaldson, the new chairman of the Securities and Exchange Commission.

Source: Wall Street settlement: The overview; 10 Wall St. firms reach settlement in analyst Inquiry, The New York Times April 29, 2003

Last week they got to know their investment advisers a little better. Ten major Wall Street investment firms agreed to pay $1.4 billion to settle conflict-of-interest charges; they would do things like issue enthusiastic research reports about the same stocks they were describing as worthless junk in internal e-mail messages.

Source: A Fraud by Any Other Name The New York Times May 4, 2003

Analysts produced deceptive and inaccurate reports in order to induce investors to buy dud shares.

The e-mail messages also showed analysts, including Henry Blodget, who followed Internet stocks for Merrill, privately deriding companies whose shares they were recommending to the public.

Source: Wall St. Firms Said to Break E-Mail Rule The New York Times May 7, 2002

What is very revealing is how the abolition of conflict of interest legislation was reinterpreted by Citigroup's rewarded, admired, most successful and most enthusiastic analyst.  He made millions in incentive payments.  It illustrates how the sector was thinking.

By the time the firm was taken over by Smith Barney in 1998, Mr. Grubman had toppled rivals and gained the top ranking in his industry on the All-American Research Team, as listed by Institutional Investor magazine.

"What used to be a conflict is now a synergy," he (Grubman) told Business Week in May 2000.

Source: Telecom's Pied Piper: Whose Side Was He On? The New York Times November 18, 2001

A slap on the wrist: But the power of the market and the possible impact on the collapsed share market and economy if the cases were prosecuted eventually won the day. In an estimated US$7.7 trillion fraud the culprits were able to negotiate and paid out only 1.4 billion. No one went to prison. This was only one of the many frauds and scandals that these companies were involved in - and which were treated similarly.

The market found multiple ways of denying or explaining away what had happened. We see the same pattern of regulatory responses in multiple similar financial frauds in Australia. If we look at the response to rorting of the funding system in aged care in Australia that I described earlier on the Consequences of marketplace thinking page it looks very similar.  No one wants to really rock the marketplace because it sends shivers through the economy and politicians would rather run for cover.

Mr. Spitzer attacked "an overarching effort to deregulate the financial services industry over the last 20 years."

He said, "I think we may now be paying the price for that deregulation," which came amid reassurances from investment and commercial banks that they could police themselves.

Source: Senators Question Effectiveness of $1.4 Billion Settlement The New York Times May 8, 2003

The $7 trillion in losses that investors have suffered since 2000 along with revelations that some research analysts had recommended stocks while privately warning their big clients against them have made small shareholders deeply suspicious that the markets are rigged against them.

In a worst-case possibility, regulators could have destroyed Wall Street in order to save it - - - - in fairness to the regulators, they had to take into account other considerations in fashioning the settlement. Tougher action on the nation's top investment firms could have dealt a terrible blow to important institutions at a difficult time for the capital markets.

Source: Settling for Less The New York Times December 27, 2002

They do it all over again 10 years later: We should not think that years of regulatory effort have changed behaviour.  The big international banks are still at it. The US groups Citigroup, JP Chase Morgan and Bank of America were joined by the UK giant Barclays Bank and the Bank of Scotland but it seems that many others were involved as well.  They ran a price fixing scam across the world. Once one did it the others followed.  Large numbers of investors lost billions as the banks lined their pockets at the ultimate expense of investors.

The culture in these companies is revealed by the terms used in chat rooms including “The Cartel” or the “bandits club” and comments like “If you ain’t cheating, you ain’t trying,”   There were some suggestions that government officials knew but might have looked the other way.

The cultures:  What we are seeing in all these examples when the practices become so entrenched and blatant that they cannot be ignored is the way people have "awakenings to cynicism" and joked informally to acknowledge what they were doing.  They knew but in their actions ignored this.  In the National Medical Enterprise (NME) health care example I used on the previous page doctors and other staff used terms like "wave therapy" to describe the visits doctors charged for after handing the care of their patients over to the company. "Charting parties" were the meetings doctors and staff were required to attend on Saturday mornings where the charts were massaged so that the maximum could be charged and insurers would not challenge this.

Insight: It is interesting that retired CEO of Citigroup, Sandy Weil suggested that instead of oversight and punishment they should legislate to change the way the market operates so that conflict of interest situations were removed (ie the perverse incentives).  He said, "Bring back the Glass-Steagall Act of 1933 which led to half a century, free of financial crises”.

Weil led the formation of Citigroup in 1998 when this legislation had been repealed, became its first CEO, and was in charge during the 2002/3 scandals described above.  The chances of a sensible suggestion like this being adopted in the current toxic free market US culture is remote. I am suggesting that in aged care in Australia we should similarly legislate to change the way the market operates and so remove the perverse incentives that are compromising care.

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Financial institutions in Australia

Financial institutions in Australia

Banks in Australia

The banks in Australia are not far behind Wall Street as revealed by the following reports

Financial advice

But the major problems have been in the financial advice sector where people are particularly gullible and vulnerable.  Many lost their life savings by following the advice of those they trusted.

The financial advice scandals have all of the characteristics of a culturopathy.  As I have said on many occasions over the years, once a particular business practice is successful for one, then others follow and if they fail to do so then they make less money and can't compete. Its like a virulent infection.

The customers who don't have the knowledge or power to be effective are harmed. The people doing this simply don't want to look or acknowledge the consequences of the advice they are giving unless it affects them.

First we had the Storm Financial scandal in 2010 which caused a furore. Instead of learning from that and sorting themselves out all of the banks followed the leader and competed in the same way. First there were  the Commonwealth and Macquarie banks in 2014.  Then on ABC's 7.30 Report in March 2015 we discover that the NAB had been doing the same thing and scrambling to cover it up.  They were followed soon after by the ANZ and then by Westpac.   

Here are a selection of articles that tell the story.

This is a saga of how a succession of vulnerable people were deceived, misinformed and their lives ruined by all of the big Australian banks.  The stories are similar but I am going to concentrate on the Commonwealth bank where we have more information and a whistleblower has told us exactly what was happening. The outcry and publicity resulted in a senate inquiry but not in the Royal Commission that most wanted. The neoliberal Abbott government were behind the banks and not interested in acting effectively to change the banking system.

How does this happen?  Here we have a large number of organisations, most of them banks, the most trusted institutions in the country. We trust them with our money and when we are confused and unsure about money we go to them for advice. Are these truly evil grasping people willing to defraud others of what is rightfully theirs. Its difficult to accept that corruption is so widespread.

The whistleblower in my example of culturopathy (NME) on the previous page describing culturopathy said “this is the way they think”. Could this be happening here?  Perhaps they also don’t see that what they are doing is wrong and are unable to acknowledge it or the consequences - even when it is obvious. 

Economic success has become so important to them that, like NME, the acknowledgements and apologies and even the guilty pleas they make are based on legal advice and do not reflect their understanding of what happened.  They can't conceive that there are fundamental flaws in the system they believe in. The pressures in the system won't let them think differently.  They are likely to do something similar in another part of their business. 

I want to make the point that culturopathy is a pervasive problem, a facet of human behaviour, something we need to understand and constantly confront.  It is not reasonable to claim that aged care is different and this could not happen there.  It already has in the USA and in the UK.  There is much to suggest that it has here.

Example: The Commonwealth Bank

The worst offender in the Financial Services scandal was the Commonwealth Bank. The regulator ASIC was very slow off the mark in most of these scandals.  It did nothing for 16 months after whistleblowers from the Commonwealth Bank reported what was happening.  Perhaps these market organisations, and even the regulator whose members are drawn from this market, simply don’t see it the way the rest of us do.  Knowing the consequences of speaking out Jeff Morris, the whistleblower, resigned before he went public.

Refusal to compensate: The Commonwealth Bank were very resistant to refunding their clients the money that they had defrauded them of by giving shonky advice.  This was advice that benefited the bank and its staff but harmed its customers. They weaved, ducked and procrastinated.  ASIC eventually forced the bank to pay for independent 3rd party assessment and advice on their cases. They had to be put under considerable pressure before they finally did so. The issues arose in 2008 but it was muzzled until a whistleblower went to the press in 2014. No one was fired until it all went public years later.  It was 2015, seven years after the bank were aware of the problem before many received compensation.

Authorities were first advised of the problems in late 2008.  The bank would have been aware of them soon after. Some clients were already taking action.  Seven years later those who were defrauded were being told that it would be years before they get compensation from the bank.  The allegations made suggest that the bank tried to hide, cover up, pretend and delay and that both ASIC and the Abbott government who refused to mount a Royal Commission were very happy to keep it all unresolved.  On The Drum in 2014 whistleblower Jeff Morris spoke of  a “rotten culture” and “burying problems and covering them up”

Important in driving the culturopathy was the payment of incentives to financial planners for meeting targets set by the Commonwealth bank.  Planners immediate  managers would have been urging them on and welcoming their success.  In the section "Looking Differently" I will be writing about the adverse impact of incentives in vulnerable market sectors.  They can be very important in the development of culturopathy in the marketplace. They played a very important role in facilitating culturopathy in health care in the USA.

The banks were not driven by financial pressures.  Banks were all making huge profits during this period and that was what it was all about - competition to keep up or exceed competitors by making ever bigger profits.  True market believers aggressively assert that it is competition that the makes the market work and so fixes any problems.  For them it is an unchallengeable truth.

Paranoia about whistle blowers:  Instead of being up front acknowledging their failure and praising those who had stood up for the clients, the reports show that the bank was obsessed with containing information, finding out who was blowing the whistle and trying to stop anyone else from doing so.  These clients were people who had trusted the bank and the bank was ethically obliged to serve them. They behaved as if they were the victims and they probably thought so. They seemed to be totally focused on themselves and be quite incapable of entering into the lives of those they claimed to serve. They have pursued their critics ruthlessly.

CBA's failure to acknowledge its failures promptly and address them resulted in vast publicity.  I have selected some of the many articles that tell the story below.  So far, no one has been charged or prosecuted for the financial advice scam:

Individuals working in a culturopathy where customers are being defrauded can get the message and then see no reason why they cannot defraud the company for their own benefit.  It seems that some employees were and the bank reported them to the police.

An aggressive response: There was a consumer advocate, Michael Fraser who gathered information and assisted those who had been defrauded. Perhaps the bank thought there were more whistleblowers. The bank hired private investigators to watch politicians who were pressing for an investigation and to photograph everyone Fraser had contact with believing he was getting information from bank insiders.

Fraser spoke to members at the bank quite strongly. Instead of addressing the issues he raised the bank seized the opportunity and funded one of its staff to commence a defamation action against him.  Fraser is a do-gooder who does not have the money to employ lawyers to defend himself.  The intent was to silence him and to find out who his contacts in the bank were. they tried to use court procedures to find out who Fraser's contacts were and get access to his hard disk in order to identify the whistleblowers.

A consumer advocate who was spied on by the Commonwealth Bank now faces a legal action that should send shivers down the spines of whistleblowers around the country.

 - - used the discovery process to seek the names of CBA whistleblowers and any relevant communications and correspondence with certain journalists,- - - want access to all of Fraser's hard drives.

CBA got caught red handed in a spying scandal, with senior politicians spied on and photographed by private detectives at a political fund raiser

CBA hired global security firm G4S to conduct "Operation Lantern" on Fraser

- - - -  a leaked internal bank memo to G4S revealed the bank requested the spying agency take photos of people Fraser met to "allow for the identification of individuals". The memo also revealed that the bank wanted to confirm if Fraser was receiving information from bank insiders, something that raised eyebrows at the time about the real motivation of the bank. "There is some suspicion Fraser is being fed information from another employee of the bank but 'we have not been able to confirm this'."

"Throughout the financial planning scandal, CBA's focus was on hunting down and punishing the whistleblowers, in contrast to rogue planners and the crooked managers who covered up for them, who in many cases were rewarded," he (Jeff Morris CBA Whistleblower) said.

He (Morris) went to ASIC in late 2008 and was ignored for 16 months then left to negotiate his own exit from CBA.

Source: CBA funds defamation action against consumer advocate Michael Fraser Sydney Morning Herald, 14 Apr 2015

Michael Fraser's battle

 Doing it all again: The new insurance scandal

Less than  a year later in March 2016 it all happened again.  Far from sorting itself and its corporate culture out the Commonwealth Bank had continued doing the same sort of thing in its insurance business.  Once again it was a whistle blower, this time a doctor who was speaking out.  It seems that the Commonwealth Bank were devising strategies for refusing to pay out insurance for patients who had insured for financial coverage in the event of a serious illness. 

In some instances outdated medical criteria were used and in others doctors were pressured to change their reports in order to give the bank grounds for denying payment.  This was often as a time when the people insured were ill, vulnerable and unable to exert their rights.

Worse still when those who felt they were being defrauded attempted to assert their rights the company CEO was very ungracious and aggressive hinting that some were simply seizing the opportunity presented by the publicity to line their pockets.  In a long interview Ian Naurev gave a very mixed response, acknowledging, apologising but minimising and trying to explain the inexplicable away.  It seems that nothing had changed and they were incapable of seeing what they were doing, and had done in the past, as others saw it.

You have an organisation that throws up difficulties, hide behind technicalities, bully their way with their medical and legal experts... against a helpless and defenceless claimant. How can that be right?

But that is also in the context of claims assessors coming to the medical team, asking us to either delete opinions that we have given or to change an opinion that we have actually given, because it ran counter to a claim strategy. - - - - They were quite blatant about it: "Can you please change it or delete it, so that we can go to someone else to provide another opinion that's more favourable?"

Source: Money For Nothing ABC Four Corners 8 March 2016

Reflection on this

The Commonwealth Bank was not the only bank involved in the financial advice scandal. All of the big banks were doing it and they had to compensate those they had defrauded.

Its a fascinating saga and the articles make interesting and revealing reading.  Their behaviour has earned the Commonwealth Bank a vast amount of adverse publicity. The more they tried to whitewash it and find out who had broken ranks the worse it became. Any sensible organisation would have dealt with this openly and promptly, apologising and reimbursing their clients. The damage to their reputation is immense and it gets worse as Fraser uses the internet to ask for donations to help him fight the case in court. It is worth noting that Fraser has also supported and helped those exploited by 7-Eleven stores.

The original philosophy expounded by Milton Friedman, the founder of free market ideology in the 1970s considered "social responsibility" to be a "fundamentally subversive doctrine".  Friedman focused on responsibility to shareholders and hardly mentioned the customer. Its as if she was irrelevant. I wrote about the ideas underpinning free market beliefs near the end of the last slider when I analysed the underlying dynamic of markets on a marketplace page "Analysing in greater detail". In the 1970s the market and politics were ripe for an ideology and they seized on it with great enthusiasm.  By the 1980s Friedman was advisor to Maggie Thatcher and Ronald Reagan and it did not take long to cross the Pacific.

The Commonwealth Bank seems to be a very good example of these free market beliefs taken to their logical conclusion.  The reports suggest that it has been very successful in making money, has ignored its customers and has refused to be socially responsible - let alone be accountable for its actions.

The only logical conclusion you can draw is that these people have an enormous blind spot and simply don’t see what Morris, Fraser and the rest of us see. They think that the way they conducted their business was legitimate and that they were not doing anything wrong. After all (and they are right) this is the way everyone else in this marketplace conducts business.  They don't accept for a moment that dealing with vulnerable customers is different.

Other insurers:  I have had personal experience of ruthless international insurers and have had to take one to court.  They settled as soon as I put up the money to go to court and they realised that I was not going to be intimidated.  It is interesting to see that other insurers in Australia are allegedly hiring private investigators to harass and intimidate people who make claims against them.  

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Exploiting anyone who is vulnerable

It seems that whenever there is a group that is vulnerable the market will find ways of exploiting them.  Someone will start it and to compete others will follow.  Those who can't bring themselves to do this go elsewhere or else go under.

Government regulators turn a blind eye and those in the community who see it also turn a blind eye or are powerless to investigate and prove it.  It develops insidiously and takes a long time to be exposed.  All too often it is ignored and the response by government is inadequate so that little changes although those involved are more careful. 

Foreigners holding Australian visas that allow them to work in Australia are particularly vulnerable. I will deal with them first.  The exploitation of foreign students working in 7-Eleven stores is another typical example of a culturopathy.  It is also reveals how some leading business figures think and behave.

Vulnerable international students

Vulnerable international students

Many will probably remember the 7-Eleven Four Corners scandal but will see it in isolation consider it an aberration.  As I will show it is a giant red flag to a massive problem affecting thousands of employees in Australia but few of these are Australians. It is also a large red flag to the way our marketplace and our society thinks and behaves – how self-interest in the marketplace overwhelms any sense of social responsibility and responsible citizenship.

Visa holders and particularly foreign students are uniquely vulnerable for a number of reasons and as always the market has seized on that vulnerability. Across the country employers small and large have exploited this vulnerability and it has been going on for years.

There are three groups of foreign employees at risk.

  • 457 Working Visas are used to bring foreign workers into Australia to provide work that Australians won’t or can’t do. They have received more general attention because they have not been used as intended and they have been taking Australian jobs. What has not been so obvious is that because they are vulnerable they have been exploited themselves so making it much cheaper to run a racket that employs and exploits them than to employ Australians.
  • Working Holiday Maker (417 and 462) visa holders
  • International student visa holders are young and particularly vulnerable

Example: The Seven Eleven Scandal – Vulnerability in the franchise model

Who is 7-Eleven (Link 1 below)

7-Eleven was founded in the USA in 1927 and has survived multiple ups and downs and several names. It became 7-Eleven in 1946 after the second world war.  It entered the franchise business soon after this. Between 1987 and 1990 it was caught in the financial crash and entered bankruptcy. It was rescued in a buyout funded by Japanese investors. Its headquarters are in Dallas in the USA but its parent company Seven-Eleven Japan Co is in Tokyo. It currently franchises stores across the world including Asia, Europe, North America, and Australia.

In 1977 an Australian brother and sister were licensed to use the 7-Eleven franchise model in Australia in 1977. It was very successful and made them very wealthy. it operates 620 stores on Australia.

Outline of the scandal

This scandal involves mostly international students. Their visas only allow them to work for 20 hours a week. If they work more than this they risk having their visas revoked. Finding employment for only 20 hours a week was very difficult. That was a vulnerability that 7-Eleven exploited. It is a story that once again illustrates a typical culturopathy. But is shows much more. It shows how deeply pervasive this is in the business community and the patterns of thinking they use to justify anything they decide to do.

The Franchise model created an opportunity to shift legal responsibility for its conduct from 7-Eleven itself to its franchisees who paid the workers. It is clear that the contracts with franchisees gave 7-Eleven such a high proportion of the profits that franchisees were not financially viable if they paid normal wages.

Franchisees were only profitable if employees were paid half of what they were entitled to. The 7-Eleven model for franchising was very profitable at the expense of franchisees who were also being exploited. 7-Eleven’s model may not have been viable had the franchisees received enough money to pay minimum salaries. What the arrangement did was make the franchisees break the law and protect 7-Eleven from the legal consequences of its policies.

The unresolved question is whether this was a deliberate strategy and whether this was known and made clear to potential franchisees – or whether these businessmen did not realise this and were willfully blind – or operating in “bad faith”. They denied knowledge of the fraud when it was exposed but evidence and the statements by a whistleblower show that they could not have been ignorant. If not then the degree of willful blindness and “bad faith” is staggering.  Without actually reading all the material its difficult to understand it all but I will try to give some idea of what was happening.

A citizen embracing his responsibilities

Michael Fraser is a remarkable person. More than anyone else he has embraced his responsibilities as a citizen. When he identifies problems in his society he acts for his community and does something about it. I have already described his involvement in the Commonwealth Bank scandal and how they attempted to silence him.

Once you have experienced and studied this sort of social dysfunction you become much more aware of it and identify it far more readily. When you see it you realise its not isolated and feel compelled to do something to address the problem.

Michael lived near a 7-Eleven store and in 2012 the international students working there told him that they were being forced to work twice the hours they were paid for and if they objected they would lose their visas. They told of friends with the same experience. Michael investigated and found that this seemed to be the norm across all 7-Eleven stores. Many told of the way they were threatened and their vulnerability exploited as the company made vast profits. He enlisted a lawyer and they started planning a class action on behalf of the employees.

But Michael also realised that the franchisees were themselves being exploited and pressured into illegal behavior. As a consequence this attracted franchisees who were prepared to exploit the students to the business.  Those who could not bring themselves to do this went elsewhere.

Michael spoke to 7-Eleven head office but they were not interested in his concerns. When staff went to Fair Works Australia the franchisee was investigated and required to repay a fine and repay the wages. But by then the owner had moved money elsewhere and went into liquidation. The students did not get the money owed and lost their jobs as well.

Michael finally went to Four Corners who joined with the Sydney Morning Herald (SMH) to investigate. Both published on 31st August. 2015.  What was exposed is largely due to Michaels efforts.

The story.

(See Endnote links: 2, 3 and 4 below)

The story of the students and the impossibly predicament in which they found themselves was exposed. No one would employ them for only 20 hours, so to work at all they had to break the law. To survive and support themselves while they studied they needed to work.

The ABC Four Corners/SMH and subsequent material provided strong evidence of the following issues. Fair Work and other legal processes are ongoing and many of these matters have not yet been fully resolved.

A. Knowing what was happening: 7-Eleven could not have been unaware of what was happening unless they were willfully blind. They had payroll records and also instore surveillance video. A whistleblower indicated that:

We've suddenly have gone to from turning a blind eye to digging up as much as we can on franchisees and then putting it on the record. And in the short time we've been doing that - the last three or four weeks - almost every franchisee has been caught not doing the right thing, that is to say: not paying correctly

The only reason that anything has changed is that I think the company now fears that they're going to be exposed

It's almost 100 per cent of franchisees who engage in wage fraud. So head office are not just turning a blind eye: it's a fundamental part of their business. They can't, run 7-Eleven as profitably as they have without letting this happen. The reality is: it's built on something that's not much different from slavery.

B. Making a fortune: The brother and sister who held the franchise had amassed a fortune and lived lavishly.

C. The workers: There were 4000 current workers, mostly students. Vast numbers were paid half or less than the minimum wage (usually about $10 or $12 an hour)

D. The Fraud:  Students were paid less than half the minumum wage and records were deliberately falsified to hide the deception.

E. Ecomnomic viability: The Franchisee arrangement was not financially viable if workers were paid minimum rates. 7-Eleven exerted very tight control over its franchisees so they had little choice.

ALLAN FELS: I would never sign an agreement with 7-Eleven, because the only way of making profit in many cases is to underpay workers and to break the law.

F. A bad global business: In the USA 7-Eleven had a poor reputation for controlling and exploiting its franchisees.

The franchise model is based on the US model, which is a 50:50 split but wage costs are far lower than Australia where the franchisees get 43% and 7-Eleven 57%.

G. Not the first time:  Fair work Australia were aware of the problem and had raided 7-Eleven stores three times over the preceding 6 years – including 20 franchisees in 2014.. The penalties they were able to impose were insufficient to be a deterrent and they did not have the resources to mount a wider investigation. In fact Fair Work’s funding had been recently reduced by government.

H. Just how many knew: Many including government must have been aware but no one wanted to look.

MICHAEL FRASER: They say, "Why doesn't someone do something? The Government knows, the Tax Office knows, the Fair Work know, head office knows, everybody knows. Nobody seems to care." And they can't understand: why, why, why does no-one care?

I. Denial: 7-Eleven strongly denied the allegations made but announced an independent review. They asserted that “"We cannot allow the few to taint the achievements of the many." 7-Eleven tried to shift the responsibility to the franchisees and legally they were responsible. Morally and ethically 7-Eleven was.

J. Trying to limit damage: As soon as it learned of the Four Corners/SMH investigation 7-Eleven "head office sent out its foot soldiers to visit all 620 stores across the country to remind franchisees they are not allowed to talk to the media - - - ".

The immediate responses

(See Endnote links: 5, 6, 7 and 8 below)

K. Political response: After the Four Corners Program the opposition labor party spoke out about this urging that these workers be given amnesty so that they could come forward and lodge their claims against 7-Eleven. The government remained silent and did nothing. It was later alleged by Fairfax and repeated by SBS that the prime minister held shares in the Japanese owner of the US company that licenses the franchise to the Australian owners. He does not own shares in the Australian company.

L. Extending a senate review: A Senate review into the misuse of foreigners working on visas was extended to include the 7-Eleven scandal. It took additional submissions and held interviews. Their report investigated these issues.

M. The Union response: Unions have usually been more concerned about visa holders taking Australian jobs – something government has not addressed. They have now been shown to be correct. They have not been particularly active on behalf of the visa holders.

The relevant union is the Shop, Distributive and Allied Employees Association (SDA). It claimed that its efforts to communicate with these workers had been unsuccessful. It immediately setup a hotline and website to help them. Given union criticism of 457 visas in the past one wonders if the workers will respond.

N. Ongoing company denial: The chairman of 7-Eleven continued to deny knowledge claiming that “relatively few franchise owners are doing this and that the “investigation and the independent panel will turn that up”. He claimed that the fraud that had been exposed was the franchisee’s responsibility. He did acknowledge this was “on their watch” and they would take responsibility for paying those who had not been paid properly. Allan Fels past leader of the ACCC was appointed to lead the independent inquiry and decide how much past workers should be paid. Their willingness to do this suggests that they genuinely thought this had all been overblown.

O. Resignations: A month after the Four Corners program on 30 September the chairman and CEO both resigned from the board of 7-Eleven. The new chairman Michael Smith had been on the board for 16 years so was very much part of the family responsible for the fraud. He also indicated that “the board had no idea of the extent of the problems”.

P. The who's who of the business establishment: The Financial Review took a more general view indicating the “profound impact on the reputation of the brand, the board and senior executives”. It was “a breakdown of corporate governance and a crisis of complacency”. They saw it as a wakeup call for Australian companies and other directors. Because of the scandal the past chairman of 7-Eleven lost his seat on the Australian Olympic Committee.

Michael Smith, the new chairman had been president of the “high-profile Australian Institute of Company Directors” but he had now resigned from this. He was not a novice director and in this role “he knows chapter and verse the role of directors, corporate governance, risks and compliance”

The CEO of 7-Eleven was chairman of the Franchise Council of Australia. He stood down after the scandal.

The article indicated that the board could not have been unaware. In 2011 "7-Eleven management admitted to the Victorian court that non compliance with workplace laws was relatively common amongst 7-Eleven franchises". The artiicle indicated that “In the case of 7-Eleven, the evidence was there if the board had asked the right questions.” It seems that like aged care the company chose not to collect data and not to properly examine the data that it already held.

Once again we are faced by a dilemma. Here we see some of Australia’s most credible and successful corporate leaders involved in, but simply ignoring one of the most damming exploitations of vulnerable people we have seen in Australia – occurring right under their noses in a business they were responsible for.

These are not outsiders. Was this cynical and deliberate fraud. This is the Australian establishment. We might accept this as due to a successful sociopath if the responsibility lay with a single person.  In this case they were all there and they were all involved in managing this business.  Would they really have been involved in this and done nothing if what they had been doing had reached consciousness -  been acknowledged and discussed.  This is what I have called "knowing but not acknowledging".

My assessment, looking in on this from outside, is that we are looking at another culturopathy. This is the psychological response of normal people in the free market context, which is where these directors found themselves. Whether we talk about “willful blindness”, “bad faith” or "knowing but not acknowledging" is interesting but the fact is that, whatever we call it, this is how we humans behave. None of us are immune when we are put into this position.

How often is this happening across the country? The answer must be "widespread wherever there is any vulnerability".  The question for us is "How likely is it that aged care has escaped?"

The Senate Inquiry

(See Endnote links: 8, 9, 10, 11, 12, 13 and 14 below)

Q. 7-Eleven in denial: The 7-Eleven senior executive gave evidence to the senate inquiry but did not move from their defensive position. They attempted to minimize the fallout. The recently resigned chairman “denied knowing in the past that wages were paid to franchisees instead of workers, and said he believed this practice was “the exception”. One board member naively blamed “franchisee greed” for what had happened.

R. Intimidation still happening: At the inquiry professor Fels indicated that workers were not coming forward to his committee because many workers still faced “a campaign of deception, fear-mongering, intimidation and even actual physical violence”. Comment made to the committee indicated that franchisees were now being paid the full amount but workers were then taken “to ATMs to withdraw and pay back wages, and some (employers) have resorted to violence and intimidation”.

S. Number of claims: The Fels committee had already received over 2000 claims and already paid out 188 - an average of $23,000 per claim. The press speculated that the final payout would be $100,000 or even much more. SBS indicated that a lawyer reported that one of his clients had been paid as little as 47 cents an hour. It suggested that as many as 20,000 present and past workers were underpaid and the total payout might reach $30 million. Fair Work Australia claimed that one store in Brisbane underpaid its workers by $80,000.

T. Michael Fraser has more information: Michael Fraser reported in an update on his web site on 19 February 2016 that Franchisees that also owned stores franchised by other companies like IGA were requiring them to work free at the other stores in return for full payment at 7-Eleven. Some workers have been employed for many years and could be owed up to $500,000.

Workers have suggested to him that some franchisees are moving funds to other businesses and planned to empty the money out and fold the company when 7-Eleven seeks recovery of claim monies. In many instances it seems that to survive franchisees had no choice but to underpay.

Michael indicates “- - - - almost all of the District Managers, Regional Managers and senior management, who turned a blind eye to the illegal wages and exploitation, or worse, are still employed”- even one who has been heavily criticised.

He has learned that 7-Eleven’s CEO was told about the problem in 2008. He had been told that 7-Eleven were “watching my investigation closely for over 2 years”.  They could not have been unaware.

A National Disgrace: The Exploitation of Temporary Work Visa Holders - The Senate Report 

The Senate Inquiry handed down its long and damning report on about 20 March 2016. I will return later to what it found across the country with the other visa holders. It deals with student visas and the 7-Eleven issue in the lengthy report in Chapter 8.

7-Eleven’s then CEO rejected the assertion that “Head Office had used the franchise structure to insulate itself from any knowledge of underpayment (and the associated risks and liabilities)”:

The committee considered that “the protestations by the former chairman of 7-Eleven and other senior executives that they were simply unaware of the mass underpayment of employees defy belief”.

The following additional matters arose:

U. More issues: It was found that many franchisees came from India, Pakistan, Bangladesh and southern China. The report indicated that “- - many franchisees were former international students themselves and so they understood, and were able to exploit, the particular vulnerabilities of international students.”

Many students “worked night shifts for $10 an hour when they should have been paid $37.05 an hour.” They were not paid while they were being trained. Instead of being given the promised training many were used as unpaid security guards to deal with drunks. Other allegations related to workplace safety, staff having to pay for goods stolen by customers, and visa rorting by franchisees - charging between $40,000 and $70,000 to procure a visa for a student.

Professor Fels indicated that “7‐Eleven has made an unequivocal commitment to the Fels Panel to pay any employee, past or present, that we find has been underpaid and to pay, without question, the amount we determine they should be paid”. But people were still not coming forward because they feared deportation and an amnesty was needed.

Fair work (FWO) indicated that the actions promised by 7-Eleven after their 2009 and 2014 actions against the company “did not have a lasting impact”. There was frustration that “FWO appears unable to obtain evidence from key executives and board members at 7-Eleven that would allow it to ascertain whether or not 7-Eleven was willfully blind, or perhaps, complicit in what was occurring throughout its franchise network”. It seems they do not have the power to compel. The current penalties were puny.

V. Politicians: The coalition members of the committee refused to endorse the recommendation that labour hire contractors be licensed to be sure they were reputable.  This would have been similar to the probity requirements for aged care that were abolished by the coalition in 1997.  They were contrary to their free market beliefs but that is not the explanation given on either occasion.

After the Senate Inquiry

(See Endnote links: 15, 16, 17, 18, 19,  20, 21, 22, 23 and 24 below)

It didn’t take long for 7-Eleven to become self-righteous and impose their own understandings on the situation. They appointed a new CEO who was intent on protecting the business. While the new very knowledgeable and previously prominent chairman was not in evidence he cannot escape responsibility for what was done next. It could not have happened without his complicty.

The board it seems could not accept the magnitude of what they had done and the large sum that they were going to have to pay to those that the independent committee found had been underpaid. The average payout Fels was advising be paid to each student had risen to $38,000 and this was going to amount to a huge sum. They were probably still in denial and refusing to accept how extensive the problem was.

In May 2016, about 6 weeks later as the publicity blew over, 7-Eleven reneged on their undertakings and fired Professor Fels and his committee setting up an internal committee of their own. According to Fels they then lied about it suggesting that it was a joint decision. They had originally guaranteed to Fels that the complainants details would be confidential and they would not learn who the people were. This now looked unlikely.

Fels had already complained that there was “a strong, powerful and quite widespread campaign of deception, fearmongering, intimidation and even some physical actions of intimidation by franchisees”. He indicated that there were 20,000 past and present employees most of whom had been exploited who had not come forward to claim compensation. The company had been far too soft in cracking down on franchisees who were doing this.

It seems Fels committee had refused to “accept terms that would "emasculate" the independence of the panel and also threaten workers” and would not accept “an impossible standard of proof from now”.

The new chairman of 7-Eleven, the past president of the Australian Institute of Company Directors and his new CEO decided to take the process in house and to shift the burden of proof to make it harder to get paid.

The new CEO later explained that “this was how business works”. This must be one of the most damning illustrations of marketplace thinking that we have seen. It reveals the markets willingness to flout the norms and values of the community. It is analogous to the last resort explanation offered by NME the US company I used as an example of culturopathy. When all else failed some totally unacceptable conduct could be explained to those who were reluctant because it was “the American way”.

An angry Fels described the proposed new panel as bogus and claimed its intention was to minimize the payout. It seems that his panel had simply been a public relations exercise to ward off the senate inquiry. Fels committee had already awarded $12 million and it was likely to reach $100 million. Labor leader Bill Shorten described this as a “new and disturbing twist”. Turnbull “brushed away questions”.

W. 7-Eleven's attitude:  Incredibly the new CEO of 7-Eleven, a company that had defrauded thousands of vulnerable students, claimed in a videoclip on the SMH’s website on 12 May 2016 that these students were rorting his company - trying to defraud the company and “game the system” - an organised ring of fraudsters. This could only happen if Fels was complicit but the CEO did not claim that!

Fels responded to this allegation saying that “They failed to come up with any evidence after months of us asking,” He felt that their dismissal would encourage franchisees to continue their underpayments. He called on the senate to reopen their inquiry.

There is an additional audio of a damning interview of talkback radio host, Neil Mitchell talking to 7-Eleven's new CEO  on the same SMH page. The allegations of rorting by workers is repeated.  The explanation by the new CEO that “this was how business works” was gob smacking! 7-Eleven’s CEO could only say this if he actually has persuaded himself and his board that what he was saying was legitimate.

This is a replay of The Commonwealth Banks response when it also accused those who tried to claim back money they had rorted, of now trying to rort the bank. What an unbelievable way of thinking.

ABC News later on 28 May reported Fels as saying "Everything I heard from 7-Eleven for months was aimed at cutting the cost to them of the process, by setting really high standards and making it difficult to get claims through,"

Senator Lines who chaired the senate review indicated she had no confidence in the new process.

Even the business online publication, Smart Company, was alarmed and indicated that this “raises a more fundamental question about the role and responsibilities of head office and the effectiveness (or otherwise) of self-regulatory measures in tackling systemic non-compliance with employment laws”.

Smart Company indicated that “Research from the US also shows that the strength of self-regulatory mechanisms tends to fade as reputational concerns ease or enforcement pressure weakens. They challenged whether Turnbull’s assurance that the government would ‘make sure the law is enforced’ meant anything when the current law was clearly not enough.

X. Fair work gives up: The Fair Work Commission decided not to prosecute 7-Eleven itself – largely because senior staff were not prepared to say what they knew and Fair Work could not force them to do so. This made it impossible to prove that 7-Eleven had been ‘knowingly concerned’. Presumably only the franchisees are going to be prosecuted and fined!

This decision left the difficulty of firms that “remain legally insulated from the problems this creates” unresolved. Smart company concludes with the obvious - that “we cannot trust companies with clear economic interests to act on ethics alone”. They think the law needs to be changed. That has been obvious for a great many years and is really an admission that unregulated free markets are not socially viable!

Y. The union discloses more: In the face of the new CEO’s protestations the union on 16 May claimed that it had evidence that the underpayment had not stopped, that the cashback scam was still in operation and that some workers were being blackmailed. This was two months after the senate report.

It seems that to survive the franchisees had no choice. The long term viability of the franchisees when they pay full fees and so of 7-Eleven and the franchise model it uses is looking ever more dubious.

Z. Government regulates: The government finally on 19 May announced a 10 fold increase in fines and a reversal of its funding cuts to fair work. This looks like a regulatory placebo as it does not really address the underlying vulnerability problems in both the franchise and visa systems.

Government are also changing the Fair Work legislation to make franchisors liable if they turn a blind eye to rorting by their franchisees. Alan Fels is to head a new Migrant Workers Taskforce at Fair Work Australia. This will certainly be helpful.

Responses to all this

(See Endnote links: 25 and 26 below)

The web site Inside small business gives 5 bits of advice based on the 7-Eleven scandal for keeping small businesses out of trouble.

The Human Rights web site Rightnow.org.au described the extent of the failures revealed by the 7-Eleven scandal. They stress the vulnerability of these visa holders, particularly students and explains why they ended up in these jobs and had no choice.

The Class action

(See Endnote links: 27 and 28 below)

Early in this saga Michael Fraser and a lawyer started the process of inviting workers to participate in a class action against 7-Eleven but when Fels committee was set up that probably became superflous.   But they have kept their class action website open. No doubt they are waiting to see if this new internal committee does its job or if they will still have to go to court to get adequate compensation for these students..

 List of links

  1. 7-Eleven Wikipedia
  2. 7-Eleven: The Price of Convenience ABC Four Corners 31 August 2015
  3. 7-Eleven revealed Sydney Morning Herald 2015
  4. 7-Eleven: Head office is not fooling anyone Sydney Morning Herald 31 August 2015
  5. 7-Eleven: Labor urges Government to give amnesty to students forced to breach visa rules ABC News 2 Sept 2015
  6. 7-Eleven chairman denies widespread wage rorting claims, says 'relatively few' franchisees at fault ABC News 2 Sept 2015
  7. 7-Eleven Australia Management and Board Changes ABC.net 30 Sept 2015
  8. 7-Eleven wage abuse scandal has lessons for all directors Australian Financial Review 5 Oct 2015
  9. Senate inquiry on 7-Eleven wage scandal calls Russ Withers, Michael Smith Australian Financial Review 25 Jan 2016
  10. 7-Eleven workers beaten and forced to pay back wages, Senate inquiry hears The Guardian 5 Feb 2016
  11. Student worker paid just 47 cents an hour by 7-Eleven, say lawyers SBS 16 Feb 2016
  12. 7-Eleven wage scandal update: Head office, franchisees, backpay claims etc. - The arbitrator 19 February 2016
  13. A National Disgrace: The Exploitation of Temporary Work Visa Holders Australian Senate Education and Employment References Committee March 2016
  14. Senate inquiry recommends buck should stop at top for big chains like 7-11 Sydney Morning Herald 26 march 2016
  15. 7-Eleven kills independent wage panel Sydney Morning Herald 11 May 2016
  16. 7-Eleven scandal takes 'disturbing twist' says Labor's Bill Shorten Sydney Morning Herald 12 May 2016
  17. 7-Eleven is the tip of the iceberg in worker exploitation. So who's turning a blind eye? The guardian 12 May 2016
  18. Panel member says ‘jury is out’ on whether 7-Eleven can survive without underpaying staff News.com 13 May 2016
  19. 7-Eleven wage scam: Union says it has evidence cash-back scheme is 'still alive and kicking' ABC News 16 May 2016
  20. Can 7-Eleven be trusted to clean up its own mess? The Smart Company 16 May 2016
  21. Allan Fels says 7-Eleven wage scandal is tip of the iceberg The Australian Business Review 18 may 2016 (video interview)
  22. UPDATE 1-Australia to stiffen underpayment fines after 7-Eleven scandal Reuters 19 May 2016
  23. 7-Eleven: Former ACCC chairman Allan Fels still sceptical about new in-house payback process ABC News 28 May 2016
  24. New protection for vulnerable workers following 7-Eleven scandal Inside Retail Australia 1 June 2016
  25. Five things we learnt from the 7-Eleven scandal Inside Small Business 10 June 2016
  26. Lessons from the 7-Eleven wage scandal Right now (Human Rights in Australia) 23 June 2016
  27. 7-Eleven Class action classaction.com accessed July 2016
  28. 7-Eleven knew of wage fraud ahead of scandal Levitt Robinson solicitors accessed July 2016

Right Now (Human Rights group) looks at the vulnerability of international students and the problems for them on a 2013 web page.  They referred to a 2011 court case against a 7-Eleven franchisee in which the judge said "the defendant made out that they were doing them a favour - - ".  This may illustrate the rationalising that went on among franchisees in order to justify their actions.

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Exploitation of Working Holiday Visa Holders

Exploitation of Working Holiday Visa Holders

All visa holders are vulnerable to exploitation and the senate inquiry was already dealing with that. Much of this long report is about various industry’s dependence on visa holders, the impact on the employment of Australians and on training programs. Part 4 starts with a review of the vulnerability of visa holders and the structural changes that make it easy to exploitation them.  Chapters 6, 7 and 8 then deal with each group of visa holders. As indicated above Part 8 concentrated on 7-Eleven as an example of what was happening. 

The Senate committee said in a report that "a substantial body of evidence to this inquiry demonstrated blatant and pervasive abuse of the working holiday maker (WHM) visa program by a network of labour hire companies supplying 417 visa workers to businesses in the horticulture sector and the meat processing industry." In some cases, workers were treated like slaves.

Source: Senate inquiry recommends buck should stop at top for big chains like 7-11 SMH 26 Mar 2016

In his video interview with the Australian Business Review on 18 May Fels indicates that 7-Eleven is only the tip of an iceberg. The practice of underpaying vulnerable visa holders is widespread.

Chapter 7 “Wages, conditions, safety and entitlements of Working Holiday Maker (417 and 462) visa holders” of the senate report A National Disgrace: The Exploitation of Temporary Work Visa Holders describes how these Working Holiday Maker (WHM) visa holders were exploited.

The Migration Institute of Australia (Migration Institute) noted WHM and student visa holders were 'consistently reported to suffer widespread exploitation in the Australian workforce'.1

Furthermore, WHMs and students do not enjoy the same regulatory protections as 457 visa workers:

WHM’s were widely exploited in the agricultural sector. One witness indicated that “underpayment, exploitation and abuse of visa workers in horticulture 'are a matter of great concern'”.  The meat processing industry was also at particular risk. Evidence was given about “the extensive exploitation of 417 visa workers at meat processing plants in Queensland, NSW and South Australia (SA)”.

Evidence - - - outlined a litany of activities, many of them illegal, including below-award wages, non-payment of entitlements under the law, coercion and threats against union members, substandard and illegal living conditions in accommodation provided by labour hire contractors, health and safety conditions, as well as the labour hire business model.

There were allegations about “Primo Smallgoods (Hans Continental Smallgoods) site at Wacol near Ipswich." This is the largest in Australia

A particular problem for WHMs on 417 visas was the way in which labour hire companies operated. They deceptively recruited WHM workers  in foreign countries. Australian companies contracted these companies to provide and look after the workers. These companies controlled the visas and so could exploit the workers both financially and by providing poor accommodation and food – even sexual exploitation. They were promised training which often did not materialise and a fee for training was often deducted from their salaries.

Visa workers were required to work exceptionally long hours. Australian workers would be paid $27 an hour and be given work for 16 to 20 hours a week even when they wanted more. The WHM workers on 417 visas were paid $12 to $15 an hour and had to work “60 or even 80 or 90 hours a week” even when they wanted less.

The labour hire contractor provided workers with “squalid and overcrowded accommodation with no proper facilities, for which they were charged exorbitant levels of rent”. There were multiple other scams that extracted money from the workers.

It is clear that the exploitation of WHMs is extensive and a systemic problem but the true exyent is not apparent.

Other reports

On 4th May 2015 in  “Slaving Away” Four Corners reported the financial and sexual exploitation of vulnerable foreigners brought into Australia to work with the food industry as pickers and packers for products sold through the large supermarkets in Australia. Large chicken processing and packing firms were a particular problem but almost everything we buy in supermarkets is likely to have been packed by migrant works many of them exploited.

Ruthless employment agencies induced them to come to Australia.  Industry employed these agencies to provide and manage the labourers.  Their continued residence in Australia depended on compliance and few spoke out.  The major supermarkets selling that food had integrity statements stating that slave labour was not used in their products.  They turned a blind eye to what was happening.

It takes much more than wide media coverage to stop practices that are profitable. A month after the Slaving Away exposures ABC news reported that migrant workers at a large meatworks in Tamworth were still being exploited and many were "afraid to speak up over workplace exploitation".  Details are at the links.

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Exploitation of 457 visa holders

Exploitation of 457 visa holders

Much has been written about the impact of 457 visa holders and the senate report reviewed this in the earlier part of their report.  These are people brought into Australia to fill vacancies when suitable Australians cannot be found to do the work. But it seems that by underpaying these workers large savings can be made and the conditions restricting their employment can be ignored or gamed.  We don't know just how extensive this has become because no one has really looked closely enough.

Chapter 6 "Wages, conditions, safety and entitlements of 457 visa holders" looks at the vulnerability and exploitation of 457 working visas and reveals it to be widespread. It is clear that it is not a few rogue operators as some claimed but “underlying structural factors that contribute to the vulnerability of temporary visa workers to exploitation”.  There have been some legislative changes in the past and it seems that these have reduced the extent of the problem.

Exploitation of these workers has however occurred in multiple industries. The report concentrated on two studies, the first in the construction industry. This describes many of the same allegations of underpayment, poor accommodation, bullying etc. mentioned for other visa holders.

The second example was nursing, which is of more interest because it applies to aged care.

- - - - including the improper charging of visa application fees and the underpayment of wages amounting to many tens of thousands of dollars. The committee notes that only 457 workers were underpaid, and that Australian workers were paid properly

Mrs Axxxx had not been paid at the correct rate and consequently was owed $57 000 in underpaid wages

Claims that only 'rogue' employers are doing the 'wrong thing' and that 'most employers are doing the right thing' are hard to substantiate because the actual extent of non-compliance with Australian labour laws is difficult to verify. - - - the committee received evidence of higher levels of exploitation of 457 visa holders in certain industry sectors including construction and nursing

It seems likely that the employent of 457 visa holders in Level III and level IV nursing positions after giving them truncated and inadequate short training courses is very common.  I will descibe the Vocation training scam on the page looking at the exploitation of government funded and contracted services including vocational training.  The nursing unions have complained bitterly that 457 nursing staff are being employed ahead of better trained Australian nurses If these overseas nurses are being underpaid then this explains why.

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Anyone else who is vulnerable

Anyone else who is vulnerable

In “Game of Loans” on 30th March 2015 Four Corners exposed the systematic abuse of the poor and those who were going through a bad patch.  Short term high interest loan providers were giving loans that these people could not pay so that they were trapped in a spiral in which they had to borrow again to keep food on the table by the time the loan was paid off.  Most of the money they earned went to pay off new loans as the loan merchants made large profits.

  • Game of Loans Exploiting the vulnerably poor - ABC Four Corners, 30 Mar 2015

Those who are in debt and struggling to pay off loans are also vulnerable to anyone who offers to help them and lend them some money.  There are those who have found ways of getting some of their money before they go under.

Then there are the con men running the online betting rackets conning the vulnerable young as well as people who are already adicted into online gambling on sport where they lose large sums.

In February 2014 Four Corners looked at the pressures in the trucking industry had led to exploiting truck drivers and endangering the public.  Weaknesses in the system were forcing underpaid drivers to exhaust themselves and companies to cut corners on maintenance - a "deadly intersection of corporate greed, government inaction and an industry feeding on itself".  It was costing lives.

And if you think that it won’t happen in aged care in Australia - well its getting close. Health care has started down that track and government is helping it. The Health Insurance industry has been progressively privatised and Medibank was recently sold. The Daily Telegraph wrote an expose showing “how privatisation puts profit before people”. It used Medibank as an example but indicated that other big insurers were following. Profits were soaring. Shareholders were being rewarded and directors were getting huge bonuses. Government was helping along by increasing funding by almost 7%.

The latest Medibank scandal

Medibank was reducing costs by denying payments for a multitude of problems that were previously covered, slashing what it paid for many investigations, freezing the gap payments they contribute to doctors bills and no longer paying hospitals for complications that occurred after surgery. When complications occur, costs soar.  The consequence is that hospitals won’t accept high risk patients who are likely to get complications and patients who do develop complications can end in public hospitals.

Court action by the ACCC

The ACCC has lodged a court action against Medibank accusing it of unconscionable conduct in concealing changes it had made to their cover, charging them more than they had been told about and so increasing its profits and enabling it to sell itself better during its IPO (Initial Public Offering) on the stock exchange - in effect the government was defrauding the future shareholders it was selling Medibank to.  It was showing future owners and managers how to make more money out of their Australian customers when they became old and sick.

If proven, the allegations levelled against Medibank by the Australian Competition and Consumer Commission reveal a rampant and offensive cynicism at the most senior management levels of the health insurer even while it was under government ownership.

Source: Medibank cynical and nasty, if ACCC is right Australian Financial Review 16 June 2016

What is revealed is not only the moral depth to which government has descended - the extent to which politics itself has become a free market activity. It is an illustration of the way the market thinks and extent to which society’s norms and values have been abandoned in the health care sector. But most damaging of all it indicates all providers of care in the sector that ruthless commercial conduct (deceptive behaviour that ignores community and health care values) is now acceptable in vulnerable sectors.  Its OK if you can get away with it.

It has government and so the community’s stamp of approval. Government accusations of rorting by industry lose any claim to legitimacy. This is not a matter of whether it is legal or not and whether the ACCC wins its case, but whether it is moral and whether it is conscionable in the health care sector.

More information

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Health and aged care

Health and aged care

In the USA

On many of these pages I have used extracts and given links to pages I wrote some years ago about problems in the US health and aged care systems where culturopathic practices have caused and continue to create problems.  I give a fuller set of links to these below to show the extent of the problems there - and if there are any particular issues that anyone wants to follow.  The point I am making is that health and aged care are not immune to the market forces that created the problems described on this web page.  They have alreqady occurred elsewhere in then past.

An introduction and overview

Psychiatry and substance abuse (hospitalisation and misuse of children)

Cardiac Surgery (unnecessary major heart surgery)

Price gouging vulnerable uninsured patients

Exploiting vulnerabilities in the system

Laboratories

Accounting fraud

Renal Dialysis  

Cost cutting harming patients

In Australia

I have also used examples, quoted and given links to pages I wrote about the invasion of the Australian health system and the battle to keep large US multinationals from dominating our health care system at the time.  I have also quoted from and linked to pages I wrote describing  the early problems in aged care in Australia.  While these pages are dated they do give more in depth background.  They can all be accessed staring from the Australian overview web page.

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But there is more

There are other sectors where the vulnerability of Australian customers have been as, or even more extensively, exploited.  These are the sectors where government pays all or a major part of the money either by contracting a service to the market or by privatising services which it then pays for. These are more relevant for aged care and they will be examined on the next page.

Conclusion

Because of our human nature we find that whenever people are disempowered and there is advantage in exploiting them this will happen. If one gets away with it and can explain it away others are likely to follow.  We need only think of the sexual abuse of children that occurred in many churches. As recent scandals and inquiries have shown the disabled have similarly been mistreated and sexually exploited by those who should have been caring for them. Some of them were in aged care facilities.

Widely different views: One of the characteristics of these culturopathies I want to draw attention to is the very different ways the people responsible think, see and understand what is happening when contrasted with what their victims and other outsiders not part of the culturopathy think and see.  This is why they become so angry with one another. This was one of the most striking observations that I observed when studying the US health and aged care systems.  In the next section "Widely Contrasting views" I am going to look at this phenomenon in aged care in Australia.  In my view it is a good pointer to a culturopathy.

On this web page I have:

  1. Explored the nature of culturopathy by looking at other red flag examples in the wider marketplace in some depth
  2. Further illustrated the patterns of behaviour that develop and the extent to which this has involved trusted community institutions and credible marketplace leaders.  As shown in the quotes everyday thinking stigmatises individuals rather than addressing the underlying human and social dynamics.  Its something we all need to understand better and then guard against because we are all at risk. As concerned citizens we need to act whenever we see it happening.
  3. Given large numbers of addition examples where culturopathy has probably played a part.
  4. Shown that unless the market is structured to prevent it almost any market will exploit any vulnerability it finds that will benefit it.

There is nothing new about it.  Our prediliction to exploit the weak and vulnerable has been apparent for at least 2000 years.  Both religions and professions have recognised it and struggled to combat it.

Markets: The risks of exploiting the vulnerable in the marketplace have been recognised in market theory for well over 200 years and where possible measures taken to reduce or prevent it.  Free markets are not new.  They characterised the industrial revolution and were responsible for much exploitation and hardship.  They were a major contributor to tthe great depression of the 1930s and this led to a period of more sensible regulation of markets in which they became more stable.  The resurgence of free markets ideology ignored all the lessons of the past. I argue that it is a major contributor to our current problems.

I am not claiming that free market ideology and practices are responsible for all exploitation but I am arguing that the problems have been exacerbated and become much worse because.

  1. It does not accept that it has any social responsibility
  2. Its focus is on its shareholders and its profitability often at the expense of the customers it should serve.
  3. It fails to acknowledge the risks posed by vulnerability in some sectors
  4. Its one size fits all model and application to unsuitable contexts
  5. The powerful perverse incentives that characterise its operation in many vulnerable sectors.
  6. The impact of its hierarchical management and organisational structure on individuals and the community.
  7. The hollowing out and disempowerment of both customer and civil society which in traditional functioning capitalist democracies control the market and check its excesses.
  8. Its detrimental impact on government and democracy.

At the beginning of this page I asked the question:

If almost every other vulnerable sector has been so ruthlessly exploited, and it has been so difficult to identify and determine its extent, then what is the liklihood that aged care has escaped given the number of red flag scandals and reports that suggest that it is not delivering the care it should and that many are harmed? 

I suggest that culturopathy is so pervasive in our society and there are such strong perverse incentives in the aged care system that  the answer must be VERY PROBABLY.

What is not well understood is that in aged care both staff and customers are vulnerable. It is the vulnerability of staff that impacts most on the service to customers.  But staff are vulnerable because of the vulnerability of the customer.  By empowering the customer and the community we also empower the staff to give the service they are trained to give.  Staff and customer are interdependent and in aged care can and should support one another.

Please note: The first four sections of Aged Care Analysis are published and the remaining sections will be made available as soon as possible.

Important: Please note that it is common practice for industry bodies and their representatives to strongly deny any allegations made.  You should assume that the allegations quoted have been made but have been denied by the parties unless the original source indicates otherwise.  For more information, please view the Terms of use, Community guidelines and Privacy policy pages.

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