The Sub-Contractor Scam: ‘Certified Fraud’

But in this industry, all small business owners are routinely subjected to lead contractors refusing to pay, the unpaid debt now totalling $20 billion annually! By its very definition this is fraudulent. Under Australian law it’s definitively illegal. And it’s also criminal.

Small business is the ‘construction industry’!

Sub-contractors are small business, and by far the largest employers of Australian workers. Consider the construction industry, worth a staggering $300 billion-plus annually and wholly reliant on some 350,000 small to medium size sub-contractor businesses. Those contractors undertake 85 per cent of all construction work.

Although flippantly referred to as ‘subbies’, many of these businesses are sizable enterprises employing 20 to 30 workers. It is these businesses, and not the lead contractors, who are the major industry employers.

Such small businesses are responsible for organizing and performing building and construction work, meeting compliance codes, appointing, training and supervising their employees, and accepting the ‘normal’ risks associated with running a business.

Structured to be shifty

Over recent decades, and not by chance, there has been a significant structural shift and perverted into this pyramidal structure are major imbalances of power in contractual relationships. At the top of the chain, the head contractors are the chieftains in control of contracts. And relegated to the bottommost rank, subcontracted into silence, sit sub-contractors.

This unfairly distorted market has resulted in the ever-deteriorating conduct of the chieftains. The 2015 Senate Inquiry into the abnormal levels of insolvency in construction highlighted widespread “harsh, oppressive and unconscionable commercial conduct” frequently combined with “unlawful and criminal conduct.”

Most significantly, this ‘business model’ was created by government at the behest of big business. Abrogating their obligations in defiance of the ‘law’ and against the public interest, our pollies proclaimed ‘non-payment of sub-contractors’ as policy. Shifty practices brokered via a bent bargain has greatly benefitted big business through “inequitably reallocating risk from the large contracting companies (who collect the clients’ money) to those who are least able to bear it, namely subcontractors, suppliers and employees.”

Ultimately, those who do all the work bear the full burden of risk, including not being paid!

In the war zone: wrongful withholding of money

Wrongfully withholding money owed to small business is the best business in town! Each year, the industry’s small contractors are ensnared to be defrauded of $17 billion!

It’s simple. Small contractors are ‘con-tracted’ to do mega millions of dollars of work, supplying all materials and skilled labour. By refusing to pay what they owe, head contractors use this money to finance other projects. As Queensland Housing Minister, Mick de Brenni stated, “Many subbies are being used as pseudo overdraft facilities!”

This is undoubtedly unethical, but there follows an additional payoff: head contractors get sub-contractors to complete all the work, collect the client’s money, then pocket what they are indebted to pay as stolen ‘treasure.’

Concentration of power in the hands of a relatively small number of head contractors has fostered a culture of corruption, with bullying, intimidation and terror tactics rife. Knowing that small business does not have the money to fight back, and subject to the threat of being refused future work if they lodge claims for payment, the lead contractors employ the “take it or sue us” line – criminal conduct the legacy of official licence to flout the ‘law.’

One witness in evidence to the 2015 Senate Inquiry equated the culture to that of the battlefield on the Somme, where sub-contractors “get mowed down and fresh bodies are just poured in.”

It epitomizes the life of expendable foot soldiers in a battle without any weapons to use in their own defence. Also it indicates the brutal battering inflicted upon sub-contractors because according to the Senate Inquiry, “head contractors are often more than willing to abuse their market power” to the detriment of everyone down the chain.”

In short, it sums up the utter despair of the damaged small business owners – mere disposable pawns in this Machiavellian tragedy.

This not the first time such a dehumanizing analogy has been articulated. Commonly, building consumers and workers, who comprise the other major ‘construction’ parties, echo similar sentiments as they recount their vulnerability as the ‘enemy’ in this deadly ‘war.’

Fraud via insolvency and the ‘phoenix option’

The construction industry accounts for around 10 per cent of GDP, but disproportionally 25 per cent of all insolvencies. Here is the big “but”: according to university research, insolvent non-corporations, such as small sole traders are not included in ‘official statistics’ – adding another 60 per cent to the total of construction bankruptcies, according to the 2016 study Construction Insolvency in Australia: Reining in the Beast. Thus, instead of construction insolvencies accounting for 25 per cent, they actually account for more than half!

ASIC and the ATO advised the 2015 Senate Inquiry into construction industry insolvency of an “emerging business model” involving company directors and their corporate and liquidator advisors organizing ‘restructuring’ of the business prior to insolvency. The Senate’ sanitised reference to ‘emerging’ is erroneous – the practices are entrenched – and frankly can only be classified as fraud. Business failure, badged as ‘insolvency’ has facilitated the theft of $3 billion annually from Australia’s 350,000 small business owners.

‘Phoenixing’ for the family

Illegal phoenix activity is the deliberate liquidation of a company after transferring the indebted company’s assets to a new company to avoid paying creditors, and after setting up a new company to carry out the same business. It’s called ‘doing it for the family.’

Often funds are transferred just as insolvency is declared; often the company has been trading insolvent for years; often the crooks are allowed to keep their building ‘licence’ and sometimes the ‘contractors’ hold executive positions on the MBA. It seems all of those applied in the case of Tagara Builders, whose insolvency in 2015 left 750 creditors owed $27 million!

There are literally mega thousands of such illegal ‘phoenix’ arrangements every year. They could and should be stopped. But to indulge big business, doing a phoenix defaults to ‘legal.’ The latest insolvency to hit the headlines is that of Senator Bob Day, with the enormity of the detriment to the sub-contractors and consumers still unravelling. Illegal or not, one thing seems clear: Bob the Builder put his family first.

Unsurprisingly, the Senate Inquiry concluded that the construction industry’s high incidence of illegal phoenix activity had become a way of doing business in order to increase profits. Further, it concluded that “some company directors consider compliance with the corporations’ law to be optional.” Of course they do!

The Senators explain: “because the consequences of non-compliance are so mild and the likelihood that unlawful conduct will be detected is so low.” Contempt for ‘non-compliance’ and ‘lawless’ conduct sanctioned!

Certainly the Senate Committee were on the money. The number of construction company directors prosecuted for insolvent trading, fraud and breaches of duties is almost nil. As for it being the fault of ASIC or liquidators’ reporting, this is true. There is clearly no commitment to protect those who are legally bound to be paid for their work. The ‘no penalty’ rule confirms the illusion of ‘laws’! And as for preventing impending harm, the guarantee of no consequences undeniably acts as NIL deterrence to future criminals.

Queensland: A case study

If we take Queensland as an example, building sub-contractors number 84,000. They have more than 250,000 dependents. A quarter of a million people! When sub-contractors are not paid, the fallout is catastrophic – for them and their families, their employees and their families, suppliers, local business, the entire community. That means millions of lives devastated every year.

Let’s briefly examine the so-called collapse of Walton Construction in 2013. It left 1,350 trade sub-contractors and suppliers across Australia owed $300 million (the Creditors’ Report  listed $90 Million) – 600 of these in Queensland. This ‘insolvency’ is not significant for its size – there were bigger ‘failures’ before it – and we’ve had another 120,000 since.

Walton’s insolvency represents more than a watershed moment. It provides concrete proof of how the bureaucratic chiefs abet law breaking for their buddies.

<strong>One Walton victim

Three years on from October 2013, Beau Hartshorn is still hurting. For his young business, this was to be the biggest ‘con-tract’ he had won. He could not know Walton’s ‘plan’, or  that government had decreed it ‘legal’ to ruin his life. Walton’s ‘insolvency’ left Hartshorn’s landscaping business owed $600,000 for work on the $22 million Nambour Coles project.

As reported by Bill Hoffman in the Sunshine Coast Daily, this ‘knockout’ “killed his fledgling business, cost 10 employees their jobs and meant Beau was unable to pay suppliers he had come to count as friends. He still owes money to his grandparents.”

He was forced to sell his home and he has lost everything. He now works for a small wage and earns enough to put food on the table at his parents’ place where he lives.

“But nothing was quite as hard as telling his then 13-year-old daughter the two horses she had ridden and loved since she was four would have to be sold,” Hoffman wrote.

The postscript is that the Walton collapse was carefully contrived. From the moment Hartshorn was ‘contracted’ there was never any chance that he would be paid.

The solution: see a psychiatrist!

The solution from the Senate Inquiry is for small business owners impacted by non-payment to seek advice from ‘mental well-being’ organizations. Yes, as slave labour victims, they should go see a psychiatrist! Says it all, doesn’t it?

But there is a simple solution: just pay them. Enforce our ‘contract’ and ‘insolvency’ laws.

This sub-contractor scam is not just about a couple of ‘tradies.’ It is about the annual theft of $20 billion from 350,000 small Australian building and construction businesses. They who comprise approximately 20 per cent of Australia’s small business network, with the flow on effect to their 1.5 million employees, local communities and the economy.

At its core, this scam is about real people. It impacts sub-contractors first and then the domino principle comes into play. It leads to millions of individual lives shattered, broken families, suicides and much more – all these lives ruined through no fault of their own, all casualties of ‘certified fraud’ in this sneaky sub-contractor sting.

All victims of an industry where only money matters and people count for nothing.