Implementation and Enforcement of Rules in Singapore and the Case of China Aviation Oil

Implementation and Enforcement of Rules in Singapore and the Case of China Aviation Oil Mak Yuen Teen Director Corporate Governance and Financial Reporting Centre National University of Singapore Singapore The 2006 Asian Roundtable on Corporate Governance Session – Part II September 14-15 2006 Agenda  Singapore’s Legal System  Overview of Recent Cases  Case Study: China Aviation Oil  Proposed Reforms  Q&A Singapore’s Legal System Singapore’s Legal System  Common Law System   Law based on decisions made in earlier cases Statutes introduced to codify some of these laws  Singapore Penal Code  Other specific acts    Singapore’s Legal System Companies Act (CA) Securities and Futures Act (SFA) Prevention of Corruption Act (PCA) Overview of Recent Cases Case Study: CAO Proposed Reforms Duty of Director (CA S157)  Made mandatory duties of director  Act honestly and use reasonable diligence in duties  Expected standard depends on position, company, business  No breach if decision made losses  Singapore’s Legal System If made honestly and with reasonable belief it was in the best interest of the company Overview of Recent Cases Case Study: CAO Proposed Reforms Derivation Action (CA S216A)  Shareholder can sue on behalf of company    Not as costly and more access to evidence Does not apply to companies listed on exchange Shareholders’ only recourse is derivative action under common law  Cannot claim legal cost from company or have access to company documents Singapore’s Legal System Overview of Recent Cases Case Study: CAO Proposed Reforms Securities and Futures Act  S199 – bars persons from making false or misleading statements  S218 & S219 – insider trading   Bars persons who possess insider information from trading, regardless of reason Changes made to overcome obstacles in the past  S232 – Civil Penalty   Singapore’s Legal System Lower burden of proof No criminal sanctions for offenders Overview of Recent Cases Case Study: CAO Proposed Reforms Regulatory Bodies  Singapore Exchange (SGX)  Manages day-to-day regulation of listed companies  Commercial Affairs Department (CAD)  Investigates white collar crime  Monetary Authority of Singapore (MAS)  Regulates and supervises financial market  Corrupt Practices Investigation Bureau (CPIB)  Investigates corruption in private and public sectors  Attorney-General’s Chambers (AGC)  Deputy Public Prosecutors conduct prosecutions and guide investigations Singapore’s Legal System Overview of Recent Cases Case Study: CAO Proposed Reforms Overview of Recent Cases Criminal Actions  Diversified Type of Companies  Market Cap of S$1 billion to non-profit organizations in oil trading, education, waste metal recycling, charity  Prosecution focused on top management   Singapore’s Legal System CEO and CFO most common Little action against directors, none against independent directors Overview of Recent Cases Case Study: CAO Proposed Reforms Criminal Actions  Wide range of offences   Singapore’s Legal System Making false statements, falsifying documents, insider trading, corruption, cheating Few directors faced breach of duties offences Overview of Recent Cases Case Study: CAO Proposed Reforms Criminal Actions  Punishment   Jail of 18 weeks to years Fines of $10,000 to $1.6 million  Time taken:   From first sign of scandal to filing of charges: months to 19 months From filing of charges to conviction and sentencing: day to 10 months  Most defendants pleaded guilty Singapore’s Legal System Overview of Recent Cases Case Study: CAO Proposed Reforms Statutory Civil Penalty  Increased frequency in use  Majority of cases involved insider trading  China Aviation Holding Corporation paid S$8 million penalty  Exceptions:   Singapore’s Legal System Breaching continuous disclosure requirement Market rigging to manipulate share price Overview of Recent Cases Case Study: CAO Proposed Reforms Civil Action (Derivative Action)  Not common in Singapore   National Kidney Foundation: The only high profile case recently China Aviation Oil: Civil action in USA rejected over jurisdiction  Other cases   Singapore’s Legal System Vita Health: Director liable for misstating accounts, abusing position as executive director Vita Health and ECRC land: Directors not liable for bona fide commercial decisions which made losses Overview of Recent Cases Case Study: CAO Proposed Reforms Case Study: China Aviation Oil Overview  Jet fuel procurement, international oil trading and oil-related investment  Handled virtually 100% of China's total jet fuel imports  Began derivative speculation in 2003   Singapore’s Legal System In late 2003, bet oil price would fall Oil prices rose from US$35 to US$55 by Nov 2004 Overview of Recent Cases Case Study: CAO Proposed Reforms Overview  General failure in corporate governance  CEO and Head of Finance jailed years months and years respectively and fined  Other directors fined for making false and misleading statement Singapore’s Legal System Overview of Recent Cases Case Study: CAO Proposed Reforms Risk Management Structure Board of Directors Delegated Daily Risk Management Chief Executive Officer Received reports of risk exposure Risk Management Committee Managed Internal Controls and Business Risk Audit Committee Failed to detect losses Internal Audit Department Heads Traders Singapore’s Legal System Overview of Recent Cases Case Study: CAO Proposed Reforms Possible Breach of Duty  Directors aware CAO was speculating in options  No effective risk management guidelines in practice on options trading  Board of Directors allegedly not aware of losses incurred  Audit Committee and internal audit did not detect losses Singapore’s Legal System Overview of Recent Cases Case Study: CAO Proposed Reforms Delegation or Abdication?  Delegation of duty is not a breach  Allowed under common law and Companies Act Section 157(c)  Trusting another director or employee who lied is not a breach  Director needs to supervise the delegated function  Singapore’s Legal System A breach if suspected a problem and did nothing Overview of Recent Cases Case Study: CAO Proposed Reforms Proposed Reforms Proposed Reforms  Criminal action for breach of duties?  Improving access to civil action  Disqualification of directors  Greater transparency in investigations and enforcement actions  Addressing jurisdictional issues Singapore’s Legal System Overview of Recent Cases Case Study: CAO Proposed Reforms Q&A Thank you!