The Police have won an unexpected victory – taking over a long resented competitor, though they will not be willing or able to maintain its anti-fraud impact.

It is a weird decision, not least because it appears to have been made without warning or prior staff work. Perhaps the SFO scalp is another bauble for W Peters.  Sitting beside him I’ve seen his hatred of the SFO on the Select Committee annual review of that office. I guess no scandal-monger wants capable independent investigation of their allegations of fraud or corruption (or for that matter of any such claims against them).

The decision is bad news for NZ’s commercial community. Serious fraud has generated specialist prosecution units around the world, for good reason. Ours has been successful, in relative terms. In my opinion some of the turn-around in perceptions of business morality since the late 80’s could be attributed to their work.

The team will not be preserved. Many of them consciously chose to leave the Police.

That loss of the SFO corporate memory and the people in it will be a relief to some of our most cunning crooks.

Worse, the team is unlikely to be rebuilt in better form. A vast bureaucracy like the Police will find awkward the quirky specialists they’ll need to employ. Police pay scales will be troublesome. SFO specialists are often idealistic refugees from finance or law jobs, not natural ‘cops’.

The odds are against the Police putting any priority on fraud or indeed any property crime. Ask your neighbour about their response to a burglary complaint. The’ve already signalled that they want the SFO to chase gangs, with the name they propose for the new unit (‘Organised Crime unit’). That has nothing to do with fraud. Most fraudsters are lone operators. Even the big corporate cheats do not operate out of sight. Fraud and organised crime are linked only in lefty anti-business rhetoric.

Every business person has a stake in upholding and improving standards of honesty. Over time unpunished fraud and effective impunity will cause standards of commercial morality to spiral down. Our reputation will suffer, but that is secondary to the costs to NZ of more habitual dishonesty. The routine precautions required to do business where there is a loss of mutual trust , where there is an expectation that cheats do prosper, will far outweigh any savings that promised by the proponents of “bigger is more efficient” in bureaucracies.

Fraud is extremely hard to pursue. Around the world, statistics driven Police forces ruthlessly focus on maximising reportable clearance rates. Even if that is not their current intention, they will suck away commercial crime resources to areas where they get more convictions per hour of investigation.

I wonder how much research the govenment conducted on the Police ability to hold the types of expert needed for chasing corporate liars. There is not much drama in most fraud work. The normal Police culture is focussed on working out who did it. In fraud there is rarely much doubt about who did it – all the work is in finding exactly what they’ve done, and whether it was illegal or just immoral. The very demanding job of establishing the case to the required standard of proof needs a team culture that rewards and inculcates attributes very different from those of a typical vicious crime investigation. The Police culture does not reinforce the mana or job satisfaction of the boffins who must patiently pore through the books.

There are more political reasons. There are grounds to suspect a culture of political cowardice at very senior Police levels. If there is not cowardice there is certainly political correctness that is a soft form of corruption or favouritism. Ask the woman whose court order was ignored by the Police who watched her husband’s stolen body being buried in breach of the order.

Among other more sinister examples is the never explained Police failure to pursue Labour’s electoral frauds. I do not trust Police HQ. They unapologetically gave recklessly or deliberately untrue written answers to some of my Parliamentary questions.

Parliament will find it much harder in future to demand accountability for pursuing white collar crime. Police are rarely called upon to report to the Opposition in Parliament on the conduct of individual cases, the way the SFO has had to account. Statutory independence allows the NZ Police immunity from pursuit of decisions to prosecute or not to prosecute, even if there is widespread anxiety about corruption.

We should not be concentrating all the nation’s investigative resources and expertise in one organisation. It would be insurance to keep an alternative centre that could be beefed up if a septic element in the Police culture can not be eradicated.

There is a constitutional problem too. The SFO has been given extraordinary powers, and exemptions from normal rules that protect liberties from abuse of police powers (e.g. search and seizure, the power to compel evidence from people with no culpability). Some more offensive powers are in the Criminal Proceeds Bill. When the SFO is rolled into the Police it will be impossible to sequester those exceptions. No one will want to vote to remove them. Anti-fraud laws have been misused overseas. The US RICO (Racketeering and Corrupt Organisations) law has been used now in areas remote from what the legislators would have expected.

Accountability for spending on white collar crime will be reduced. Even if a dedicated budget is preserved, when it is held within a vast organisation the insiders can always finesse the outsiders (auditors and enquiring Parliamentarians). Standard bureaucratic practice when a budget is under pressure is to kill something popular (the Police do it periodically with the harbour Police boats).

They’ll always be able to ask, when criticised for not pursuing some fraudster, “which murderer don’t you want hunted down”.

Radio New Zealand led this morning with dramatic news – the government has “pulled off”  a “strike-breaking” deal with the PPTA. Since dawn they have been using the term “strike breaking” when they mean ‘strike-ending’. Would the brave founders of the Labour Party ever believe that their own organ – State Radio – could be exquisitely insensitive to that fundamental difference?

I guess we should welcome this evidence of ignorance. Clearly, when even the well-read Sean Plunket is unaware of the clanger, the baton of establishment influence has passed from the generation that base their politics on a recovered memory of class struggle. The reactionaries ruling under Labour colours are exclusively middle class and university opportunists. They try to disguise their hi-jack of the working class inheritance by parading union jargon as if they’d lived through the struggle. 

Perhaps Radio New Zealand will now report a lefty rapprochement with Mike Moore. Chris Trotter thinks Moore’s a scab  (traitorous strikebreaker). Radio New Zealand could think that was an Aussie term of endearment.

Regulators and successive politicians have more responsibility for the infectious panic than anyone has mentioned so far. For years they’ve been chasing votes by telling everyone that NZ is too lightly regulated and they need to stay in power to pass lots more laws to fix that.

Silly evasion by targets of TV 3’s Target program often turn a mistake into the appearance of entrenched dishonesty.

No doubt the program will never hound them for that again, after the program spokesman’s shifty performance this morning (Morning Report).

It should have been a simple “we mucked up. Our report on formaldehyde levels in Chinese clothes was an honest but careless mistake. We did not make sure we properly understood the science. We are deeply embarrassed because we are merciless on business carelessness and less than frank acknowledgement of mistakes”.

Instead he gave us a classic example of denial and evasion.

I wonder if our Minister of Corrections last night had any sense of how ludicrous his boast sounded, that NZ was the first country in the world to instal technology that would block prisoner cell phone calls.

There is a reason Damien, why you’re first.

Countries that have not turned their prisons into havens for criminals simply do not need to cover their prisons with an electromagnetic blanket. Instead they ban cell phones in prison.

The prison guards, and managers we spoke to on our recent Arizona inspection tour were simply incredulous at our problem. Indeed it took some time for them to work out what we were talking about when we asked them how they dealt with the cell phone problem.

The discussion arose when we queried the cheerfulness of a remand prisoner appealing 32 years without parole. They explained that he was a boss of the Mexican Mafia, and still running his troops from inside. The conversation proceeded along the following lines.

“Ah cellphones” I speculated.

“No, they’re not permitted – he gets his calls one day a week on those blue landlines you saw like anyone else. He runs things through his attorney. We can’t stop those visits“.

“How do you deal with the cell phone problem?” I asked. “As I said, they’re not allowed” was the answer.

“But what about smuggled ones” I persisted. “We check them in at the door, and all staff go through the metal detector”.

“No, I mean  cell phones in the hands of prisoners”. “Do you guys give your prisoners cell phones?!”

“No – they just get them, perhaps from visitors, or corrupt guards” we explained. “Our Minister of Corrections has simply given up ensuring that they can’t get them. He says it’s the same all over the world.”

“Wow you’ve got much more serious problems than cell phones. Ours simply can’t have them. Don’t you do strip searches? How do you keep out drugs then? What about weapons? Don’t they hurt each other?

We had nothing to say.

I asked a number of staff about drugs, partly because the prisoners were so obviously in better health, physically and mentally than sullen denizens of most of the prisons I’ve visited in New Zealand.

They do directed and random drug testing. One officer said the directed testing might turn up 1 positive in 20 ( after they’d had time to lose what they came in with) and the random testing turns up next to nothing.   

The key was to ensure that all visitors spoke electronically, through glass. They are trialling now video links that can be accessed from anywhere through the internet, so that family do not have to travel to the prison. It is automatically timed to 30 mins per call.

Privacy is one of the rights that become subordinate on conviction. Conversations can be monitored.

Last night’s TV news showed finance company bosses pleading for compulsory ratings in their industry. They presented ratings as an obvious fix for confidence now that five companies that have failed in two years, owing more than $1bn.

Their consensus warns us to tread very carefully. An industry consensus so often forms around what will best create and shelter a privileged club. They love rules that exclude “disruptive” newcomers, the guys who challenge the rules. 

The uncritical acceptance of that plea for compulsion is especially bizarre given the beating rating agencies are now taking internationally. The latest Economist surveys the scene. At the very moment Commerce Minister Lianne Dalziel offers ratings as a remedy, without apparent challenge from financial journalists, rating agencies are blamed for the catastrophe unfolding around securitization of the US sub-prime mortgage market. Michael Cullen’s cooler response was sensible.

 Overseas it is not high risk finance companies on the fringe of the financial system that are exposed as foolish. The international casualties include major banks, apparently led into unwise investment by reliance on rating agency appraisals.  

Rating agencies will be be risk averse for some years to come. Unfamiliar loan portfolios will be penalised. It will be harder to start a finance company (most agencies will not rate them without years of history). Compulsory rating is effectively regulatory contracting out. Overseas “experts” will apply crude rule of thumb investment rationing, based on their experiences in whatever market is currently the most troubled.

This is not necessarily a worse outcome than direct bureacratic rule-making (by the MED or the Securities Commisssion) but it does suggest we consider carefully how much better it would be than our current set-up.

I suspect there is a good case for strong incentives for rating, and state funded rating of the rating agencies, but not a de facto entry barrier through the rating requirement. 

The objective should not be to eliminate collapses. We’ve needed some. Irrationality has been rewarded for too long.

It has been obvious that many finance company interest rates have not been high enough to match their risk. The rates have not properly discriminated between the dodgy companies and the rest. The margins between risk free lending (government bonds) and bank and finance company investment have been too small. Reserve Bank governors have warned of a bubble in property prices. Plainly those who make the riskiest loans to developers are risky themselves. 

Without the occasional loss in high risk areas, careful people are made foolish and risk takers are rewarded disproportionately.

Mostly the risks have been discoverable from the compulsory disclosure documents, to those who know how to compare them. That does not include me. Careful reading of a prospectus is useless on its own. Prospectuses and investment statements are among the biggest (of many) frauds in that fraudulent regime called Securities Law.

Though I have a university diploma in accounting and have written many prospectuses I would not dream of relying on my own analysis. Comparison is everything in investing. To compare you need to know what the figures mean in relation to market norms. That in turn requires more knowledge and day to day involvement than can ever be maintained by ordinary people.

The law is written around the patent falsehood that if only issuers can be forced to print enough truth about themselves, the punters can make wise informed decisions. That is as silly as telling people they should work out the difference in value between a Rolls and a ‘top of the line’ Russian limo from their technical specifications. Instead it is the market that tells you, from the countless judgments built into traded prices. The assessments become reputation. Sources include mechanics, anecdote, journalists, prizes, gossip, insurers, rumour, buyers and sellers.

Securities law tries to ignore the information intermediaries. Indeed New Zealand’s pre-prospectus publicity law and insider trading law try to make illegal much of what they do. Then the authorities blame the poor punters when they can not work out for themselves what is a good investment and what is not.

Using rating agencies instead of prescription is probably less risky than giving even more regulatory power to those currently exercising it. But new law should focus on the integrity of ratings as comparisons, not on their intinsic reliability in predicting disaster. Honest agencies should probably get legal protection against hindsight liability.

And there should remain room for companies to start and to operate without ratings, on the basis that if and when they fail, the first investor to complain (other than about dishonesty) should be paraded publicly as a prime rated whinger.

It is time our Securities Commission used chump examples to help punters learn what they should understand for themselves and what they can not. The Australian Securities Commission used to be very good at that.

Instead our Commission is busy setting up a regime to make respectable the whole financial advisory industry, when much of it is  charlatanry.

At 5-30 am the noise in the jail is intense. Steel cell doors crash open to great clangs, reverberating with with barked military commands. Four gangs of five men are about to be chained together just for us. Ordinarily they’d have already gone, but they’ll be the last out of the jail this morning.

They’re pleased to be our spectacle. Stopping to suit the TV3 camera crew, and the separate documentary crew, will shorten their actual work time in the searing sun from perhaps 5 hours to 3. 

They’re ordered into line then they hold position, shuffling from foot to foot, chanting the cadence, “left, left, left, right, left,” like a diesel left running because it’s easier than switching if off to chat or buy an icecream. There is an unexplained delay while superiors confer into their microphones.

When the order “stand” is finally given 20 boots go out to have chains padlocked around each left ankle . 

Then we’re off down echoing passages, the men chanting and stamping one boot to maintain cadence, the other boot avoiding the chain by shuffling  and kicking  it out of the way. The second to last in the last gang is a klutz. He’s irritating the men in front and behind him by stepping on the chain, or stumbling forward and making it tug. I feel for him. The other two guys have sinister tattoos. I wonder if his lack of coordination will cost him later.

As an officer in the Territorials I avoided formal parades whenever possible. I would lose the rythym. But I know that many, if not most soldiers secretly like marching and drill as long as there is not too much. Perhaps it scratches the itch that makes people do aerobics or line dancing. We like watching and doing movement in synchrony. Yet I still find marching chants faintly embarassing. The Vogel bread ad never appealed to me.

I think I can feel horror in the nearest of the three  TV women.

I remember that too, when I first saw army drill practice. The bellowed commands and straining and machine-like movements seemed so demeaning. But then of course it became normal, even pleasurable. I remind myself that Martians might interpret the audience at a rugby match or rave party, as a political elite inflicting cruel punishment on those forced to sweat and strain before them.

 The day before was only 1 degree below Sunday’s Phoenix record temperature, and the guards tell us that last night’s monsoon downpour will add humidity to make 114 feel much worse. If it gets health threatening they tell us, the gangs will be  brought back early.

The gangs load the bus, enjoying the air conditioning because the temperature is already 80 and it is just after dawn. Their prison is not air conditioned. A call at the loading bays of the “food factory” to collect bagged lunches and water, then we’re all off in a convoy of our rental cars.

An hour later we arrive at the North Mountains Park. Each chain gang lines up at the trailed portaloo. As you might imagine orderly queuing is unavoidable.

Today’s job will be to carry black plastic bags along the highway verge picking up rubbish. The first task is to set up boldroadside warning signs. They do not say “road works” or “men working”. They say “Sheriff’s Chain Gang”.

Our liason officer, a short attractive sergeant, wearing pepper spray canisters, a taser and a handgun (loaded she assures the questioning TV crew)  explains that the point is to ensure that the people can see their taxes at work, and parents can say to their kids – “that’s what will happen to you if you dont behave”.

Gangs usually work for 5 hours only, because the procedures for checking in and the strip search when they get back use up the rest of the assigned 8 hours.

The men seem cheerful but respectful, not staunch. Only a very short Mexican is conscientious. He tells me he is a landscape garderer and he loves cleaning up – it makes him feel normal.

After a couple of hours we are off to catch up with some female gangs. 80% of the women on them are genuine volunteers (that is they have chosen the gangs in preference to other work (laundry, kitchen, cleaning etc) and not to cut the time they are on penalty for infractions (the main reason for men participating).

All the guards have emphasized the differences between men and women inmates. Plainly the women enjoy their work. Despite sweat kept at bay only by the pink towels all carry (it is now up to 103 degrees) they’re school working bee cheerful, not Volga boatmen. They’ve impeccably cleared several hundred metres of road verge, and vigorous hoeing and chopping go on throughout our time there.

When cameras from a San Francisco women’s TV channel start running I expect instant hammy dolefulness. The women are too cheerful. It must infuriate the camera crews. 

Overall, the chain gang morning confirmed the impressions of all other visits to Maricopa County facilities. What they do is not especially important. How they do it is the key.

In a tightly disciplined organisation, well run by fully empowered confident leaders, doing work they see as worthwhile, everyone gains. The greatest difference is probably at the bottom, where the alternative could be hellish. The Sheriff’s men and women could be tyrannous, if their culture went septic. Instead there is disingenuous openness and enthusiasm.

Most of the NZ prisons  I’ve visited reek with the sour smell of  resentment and wasted time.  The hopeless cynicism they convey is the true tyranny.  

The Economist recently described Phoenix as “a crime ridden mess” blighted by planners. Being here for 2 days does not qualify one to doubt that exalted authority, but it is not easy to feel confident in it when their other claim, that it is hard to walk around because of light rail construction, is so patently wrong. 

It is easy to walk around, the construction is well shielded (US litigation fears work their usual magic). But who would want to walk? Light rail is not the only planners’ spoor. There’s too much open space between the buildings. It’s too far to walk. And the buildings don’t block enough sun. An official temperature of 116 Fahrenheit today did not do justice to the felt temperature. The car thermometer said 133 F outside in the carpark.

I could not track down statistics to support other Economist claims either. Burglary, theft and car crime figures are still much lower than New Zealand’s, though high by US standards. More importantly the trends have been down since they peaked in 1994, though with a plateau in the last two years. Phoenix has shared in the astounding US wide 30%+ drop in serious juvenile (under 18) crime.

For example, US wide homicides by juveniles (under 18) have fallen from a peak of 1800 then to around 500 now. The family murder rate by juveniles has stayed pretty constant. The drop is accounted for almost entirely by an 80% fall in the rate of non-family murder.

Tomorrow I mean to get to the bottom of some of the local statistics. We are to join a chain gang as it leaves Tent City prison at 5-30 am. At 11 am we’ll start a session with Sheriff Joe Arpaio of Maricopa County. It is the biggest police district in Arizona, and part of the greater Phoenix urban area.

In 1971 I was enticed here to a  concert by someone I’d scarcely heard of – Carlos Santana. It was mind-blowing. Phoenix was not. It felt like a country town about the size of Christchurch. Of Arizona’s total population now nearing 6m, the County has 3.5m, increasing by 8000 immigrants per month. 

I’ve been doing my internet homework, especially on the all important juvenile crime figures. The youth population proportion is almost identical (NZ 27% Maricopa 27.8%).

It is idle to complain about recidivism rates from any prison system (though Sheriff Joe’s seem better than NZ’s) because no one can show proof than any rehabilitation system does much more than make its promoters feel better about themselves.

The rates that matter are the offending rates, and above all changes in juvenile crime rates. Long term, crime will drop only when recruitment of young people drops. If a prison tells kids who have not become hardened that crime does not pay, that prison works, even if it does not deter a single adult recidivist.

As far as I can tell from comparing NZ stats with Maricopa County stats, NZ comes off badly. From what I saw and heard today it comes off badly even on the humanity measure. I’ve visited 10 NZ prisons. Unrestricted visits to two prisons today (we were taken wherever we asked, and left alone to talk to any staff or inmates we wanted to) left an impression of  humane institutions run well by competetent disciplined staff, proud of their work and their colleagues. They were a powerful contrast with my NZ prison tours. Only one prison in NZ (Auckland Central Remand Prison) matched them, and its management has since been dumped.

 More to follow tomorrow….

NZ travellers like to swap dreadful warnings about the hassle of clearing US border formalities through LA. It was ‘smooth as’, for all our party (Garth McVicar, Tai Hobson, David Garrett and me) and for the film team of 5.

I thought this afternoon was turning tiresome for a moment or two. First when the passport inspector wanted to know what I’d been doing for a week in Pakistan last year, then when she thought she had an even more dubious story.

“What” she asked “was a lawyer doing looking at the US criminal justice system?” when she was sure the US had much to learn, not to teach. She was stunned to hear that the US`nationwide drop in serious and youth crime from around 1993 was over 30% and that it was far better than had been acheived by any comparable country. She said “well we must of had further to improve”.  There is some truth in that, but she looked delighted to hear that the UK now has higher rates of serious and violent crime.

We probably do too. There are no widely accepted NZ/US comparisons but from victimization survey figures – the gold standard of crime measurement – it appears ours is likely to be as bad or worse than the UK, and consequently the US.

Passport control did not go so swimmingly for the young family at the next booth. A wife wearing the headscarf probably did not help. They were  at the booth for at least 1/2 an hour, the whole time our process took, including baggage collection.

I felt for all innocents who pay the price of the actions of one’s stereotyped kin. I was one last time I went through LA, though I still do not know whose misdeeds I was paying for.

I travelled (to a Parliamentary conference in Mexico) on what I thought was the privilege of an MP’s diplomatic passport and visa. My wife Catharine breezed through on her plebeian documents while I was detained for special interrogation. The passport control guy wanted to know what I’d done to offend Uncle Sam. “This is the kind of visa we’d give Fidel Castro” he said. “It only lets you go through for a few days, and you have to be in and out on exactly the days stated”.

I briefly veered toward conspiracy interpretations. Perhaps the government had organised it to cause grief for opposition MPs? I never got around to finding out.