Corporate fraudulent and criminal behaviour

 Financial crime
 Crime is conduct prohibited by the law.
 Financial crime can be international in nature, and there is a need for international
co-operation to prevent it.
 Law tends to be organised on a national basis.
 However, as we shall see later, some crime, particularly money laundering, is
perpetrated across national borders.
 Indeed, the international element of the crime contributes to its success.
 Particularly with regard to money laundering, international bodies are having to co-
operate with one another in order to control financial crimes, which spreads across
national boundaries.
 Insider dealing
 Insider dealing is the statutory offence of dealing in securities while in possession of
inside information as an insider, the securities being price-affected by the
information.
 The Criminal Justice Act 1993 (HMSO, 1993) (CJA) contains the rules on insider
dealing.
 It was regarded and treated as a crime since a few people are enriched at the
expense of the reputation of the stock market and the interests of all involved in it.
 Insider dealing is dealing in securities while in possession of inside information as an
insider, the securities being price-affected by the information.
 To prove insider dealing, the prosecution must prove that the possessor of inside
information:

 Dealing is acquiring or disposing of, or agreeing to acquire or dispose of, relevant

securities whether directly or through an agent or nominee or a person acting
according to direction.
 An offence is also committed if an individual, having information as an insider,
encourages another person to deal in price-affected securities in relation to that
information.
 Securities include shares and associated derivatives, debt securities and warranties.
 Inside information is 'price-sensitive information' relating to a particular issuer of
securities that are price-affected and not to securities generally.
 Inside information must, if made public, be likely to have a significant effect on price
and it must be specific or precise.

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 Corporate fraudulent and criminal behaviour

Insiders
 Under the CJA a person has information as an insider if it is (and they know it is)
inside information, and if they have it (and know they have) from an inside source:

 A person does not have to actually be one of the above to be an insider.

 They will also be an insider if they are given the inside information by someone who
is an inside source – for example, a friend or family member.
General defences
 An individual has a defence regarding dealing and encouraging others to deal if they
prove that:

 Defences to disclosure of information by an individual are that:

'Made public'

 On summary conviction an individual found guilty of insider dealing is liable to a fine

not exceeding the statutory maximum and/or a maximum of six months
imprisonment.
 On indictment the penalty is an unlimited fine and/or a maximum of seven years
imprisonment,Contracts remain valid and enforceable at civil law.
 The offender or any professional intermediary must be in the UK at the time of the
offence or the market must be a UK regulated market.
 Remember that insider dealing is a criminal offence, market abuse is a civil matter.

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 Corporate fraudulent and criminal behaviour

 Market abuse
 The offence of market abuse under the Financial Services and Markets Act 2000
(TSO, 2000) complements legislation covering insider dealing, by providing a civil law
alternative.
 The FCA has issued a Code of Market Conduct, which applies to any person dealing
in certain investments on recognised exchanges and which does not require proof of
intent to abuse a market.
 The FCA has statutory civil powers to impose unlimited fines for the offence of
market abuse.
 It also has statutory powers to require information, and requires anyone to co-
operate with investigations into market abuse.
 Market abuse is often connected with activities such as recklessly making a
statement or forecast that is misleading, false or deceptive, or engaging in a
misleading course of conduct for the purpose of inducing another person to
exercise, or refrain from exercising, rights in relation to investments.
 Market abuse is behaviour which satisfies one or more of the prescribed conditions
likely to be regarded as a failure on the part of the person or persons concerned to
observe the standard of behaviour reasonably expected of a person in their position
in relation to the market.

Examples of market abuse

 Misuse of information
 This is any behaviour by an individual that is based on information that is not
publicly available, but if it was, it would influence an investor's decision.
 Manipulating transactions
 This behaviour involves interfering with the normal process of share prices
moving up and down in accordance with supply and demand for the shares.
 For example, an individual who trades, or places orders to trade, who creates
a misleading impression of the supply or demand of securities and that has
the effect of raising the price of the investment to an abnormal or artificial
level.
 Manipulating devices
 This behaviour is the same as manipulating transactions except that the
trading is followed by the creation of false statements so that other investors
make incorrect trading decisions.
 For example, an individual buys a large number of shares to artificially raise
the share price and then makes false statements to the market that
encourage other investors to buy the shares, driving the price up further.

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 Corporate fraudulent and criminal behaviour

 Market distortion
 This is any behaviour that interferes with the normal process of market prices
moving up and down in accordance with supply and demand, such as a Chief
Executive Officer who increases the activities of their business in order to
make the company appear busier than it actually is.
 This improves the image and prospects of the business and suggests that a
share price increase is imminent, encouraging investors to buy shares.
 Dissemination of information
 This behaviour involves the creation of false or misleading information about
supply and demand, or prices and values of investments, and then leaking it
into the public domain.
 For example, a person who posts an inaccurate story about a company's
future plans on an internet bulletin board.
 Remarks made by the judge when sentencing in R v Bailey 2005 suggested
that directors will be held personally responsible for public announcements in
order to ensure the integrity of the market is preserved and the public
protected.

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 Corporate fraudulent and criminal behaviour

 Money laundering
 Money laundering is the attempt to make money from criminal activity appear
legitimate, by disguising its original source.
 Money laundering is the term given to attempts to make the proceeds of crime
appear respectable. It covers any activity by which the apparent source and
ownership of money representing the proceeds of income are changed so that the
money appears to have been obtained legitimately.
 Money laundering is a crime that is against the interests of the state, and it is
associated with drug and people trafficking in particular, and with organised crime in
general.
 In the UK, there are various offences relating to money laundering, including tipping
off a money launderer (or suspected money launderer) and failing to report
reasonable suspicions.
 There are three categories of criminal offences in the Proceeds of Crime Act 2002
(TSO, 2002).

 In relation to failure to report, the person who suspects money laundering must
disclose this to a nominated officer within their organisation, or alternatively directly
to the National Crime Agency (NCA) in the form of a Suspicious Activity Report (SAR).
 The NCA has responsibility in the UK for collecting and disseminating information
related to money laundering and related activities.
 The nominated officer in an organisation acts as a filter and notifies NCA too.
 The law sets out the following penalties in relation to money laundering:

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 Corporate fraudulent and criminal behaviour

Money laundering process

 The money laundering process usually involves three phases:

 For accountants, the most worrying aspect of the law on money laundering relates
to the offence of 'failing to disclose'.

Anti-money laundering supervision

 The Office for Professional Body Anti-Money Laundering Supervision was established
as a regulator by the UK Government to strengthen the UK's anti-money laundering
regime (FCA, 2018).
 The organisation is responsible for the oversight of professional bodies in relation to
the money laundering regulations, and aims to improve the consistency of
professional body supervision in the accountancy and legal sectors.

The Money Laundering Regulations 2017

 The Money Laundering Regulations 2017 (TSO, 2017) require organisations to
establish internal systems and procedures which are designed to deter criminals
from using the organisation to launder money or finance terrorism.
 Such systems also assist in detecting the crime and prosecuting the perpetrators.
 These regulations apply to all 'relevant persons', a term which covers a wide range
of organisations, including banking and investment businesses, accountants and
auditors, tax advisers, lawyers, estate agents and casinos.
 As each organisation is different, systems should be designed which are appropriate
and tailored to each business.
 These include:
 Risk management practices
 The business should take a 'whole firm' approach to assessing the money
laundering risks faced by the business.
 The business should also assess the risk of clients being involved in money
laundering or terrorist financing.
 The overall objective for any business is to properly identify and assess the
risk of money laundering, or terrorist financing, and to document the
assessment.

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 Corporate fraudulent and criminal behaviour

 Internal controls
 Businesses are required to have a number of internal controls in place.
 These should include:

 Customer due diligence

 Businesses are required to perform customer due diligence before
establishing the business relationship.
 Customer due diligence work includes, for example, identifying and
independently verifying customers and their agents and monitoring the
business relationship or transaction according to the level of risk of money
laundering.
 There are two levels of due diligence: simplified and enhanced.
 Reliance and record-keeping procedures
 Businesses should have policies, controls and procedures in place to prevent
activities related to money laundering and terrorist financing.
 A written record of these procedures, as well as employee training on them
(see below), must be maintained.
 Monitoring and management of compliance
 Businesses should continuously monitor and manage compliance with the
policies, controls and procedures that they have in place.
 Employees should receive appropriate training concerning the law relating to
money laundering and the business's policies and procedures in dealing with
it.
 Employee training records should also be monitored to ensure compliance
and that the employees are up-to-date as requirements develop over time.

 Note: Should a business fail to implement these measures a criminal offence,

punishable with a maximum sentence of two years' imprisonment and/or an
unlimited fine, is committed irrespective of whether money laundering has taken
place.

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 Corporate fraudulent and criminal behaviour

 Bribery
 Bribery is a serious offence which often relates to the offering and receiving of gifts
or hospitality.
 The Bribery Act created four main offences, the first three of which are committed
by individuals while the fourth is a corporate offence.
 The offences are:

 Bribing another person

 This offence is committed where a person offers, promises or gives financial
or other advantages to another person with the intention of inducing that
person to perform improperly a relevant function or activity, or to reward
them for such improper performance.
 It does not matter whether or not the person being bribed is the same person
as the one who would usually perform the function or whether the offer is
made directly or via a third party.
 Being bribed
 This offence is committed where a person requests or accepts a financial or
other advantage improperly, or as a reward for improper performance of a
relevant function or activity, or intending that improper performance should
result.
 It does not matter whether the advantage is received direct or through a third
party.
 The offence also applies if a person receives a benefit on behalf of another
person.
 Bribing a foreign public official
 This offence is similar to that of bribing another person, but is committed
where the bribe is offered to a foreign public official (FPO).
 It is committed where a person offers financial or other advantages to an FPO
or a third party with the intention of influencing the FPO in that capacity and
to obtain or retain business or an advantage in the conduct of business, where
that official is not permitted or required by the written law applicable to them
to be so influenced.
 An FPO is any individual who holds a legislative, administrative or judicial
position of any kind outside the UK, or who exercises a public function outside
the UK, or who is an official or agent of a public international organisation.
 Note: The maximum penalty for bribery under the Act is ten years' imprisonment
and/or an unlimited fine.

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 Corporate fraudulent and criminal behaviour

 Corporate failure to prevent bribery

 The offence of corporate failure to prevent bribery is committed by an
organisation that fails to prevent a bribery offence being committed by a
person who performs services for it in any capacity – such as an agent,
employee or subsidiary.
 Under the Act, an organisation includes companies and partnerships based in
the UK or doing business in the UK.
 An organisation has a defence to this offence if it can prove that it had in
place 'adequate procedures' designed to prevent persons associated with it
from committing bribery.

 The maximum penalty that may be imposed on a guilty organisation is an

unlimited fine.
 However, it is likely that its business will suffer too, as a consequence of loss
of reputation and compensation payable for civil claims against the directors
for failure to maintain adequate procedures.
 Bribery cases are mainly heard in magistrates' and Crown Courts and go
largely unreported.

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 Corporate fraudulent and criminal behaviour

 Criminal activity relating to companies

 With regard to the operation and management of companies, a company as a legal
person may be prosecuted for many different types of crime.
 However, this is nearly always in conjunction with the directors and/or managers of
the company.
 Companies have been prosecuted for manslaughter (unsuccessfully), fraud, and
breaches of numerous laws for which fines are stated as being punishment, such as
health and safety laws.
 Where there is evidence that a company or partnership has committed certain
offences, such as fraud, money laundering, bribery or forgery, it is possible for the
prosecution and the organisation to make a deferred prosecution agreement (DPA)
under the Crime and Courts Act 2013 (TSO, 2013).
 Such agreements mean that the organisation admits wrongdoing but stops short of
pleading guilty to the offence.
 In return, a judge awards a fine against the business but no criminal prosecution
takes place.
 This saves the prosecution time and money in bringing the case to court and, in
return, the organisation is saved the reputational damage that a court case would
bring. It is up to the prosecution to determine whether a DPA should be offered.
 Offering it should be in the interests of justice and its terms must be fair, reasonable
and proportionate.
 No individual should benefit from the offer of a DPA, which is why they are only
offered to business organisations.

Offences in relation to winding up

Criminal offences in relation to winding up Other offences in relation to winding up
 declaration of solvency without  Acting as a director whilst
reasonable grounds disqualified
 fraudulent trading  Phoenix companies
 Fraud and deception
 Defrauding creditors
 Misconduct during a liquidation
 Falsification of company books
 Omissions

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 Corporate fraudulent and criminal behaviour

 Declaration of solvency
 In order to carry out a members' voluntary winding up, the directors have to
file a declaration of solvency.
 It is a criminal offence punishable by fine or imprisonment for a director to
make a declaration of solvency without having reasonable grounds for it.
 If the company proves to be insolvent, they will have to justify their previous
decision, or be punished.
 Fraudulent trading
 This criminal offence occurs under the Companies Act 2006 (TSO, 2006)
where a company has traded with intent to defraud creditors or for any
fraudulent purpose.
 For example, a director obtaining credit when there is no good reason to
expect that the company will be able to repay the debt.
 There is also a civil offence of the same name under the Insolvency Act 1986
(HMSO, 1986) that applies to companies which are in liquidation or
administration.
 Under this offence courts may declare that any persons who were knowingly
parties to carrying on the business in this fashion shall be liable for the debts
of the company.
 Under the civil offence, if the liquidator considers that there has been
fraudulent trading they should apply to the court for an order that those
responsible are liable to make good to the company all or some specified part
of the company's debts.
 Wrongful trading
 Wrongful trading occurs where on a winding-up it appears to the court that
the company has gone into insolvent liquidation and, before the start of
winding up, the director knew or ought to have known that there was no
reasonable prospect that the company would avoid going into insolvent
liquidation: S214 Insolvency Act 1986.

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 Corporate fraudulent and criminal behaviour

 Acting as a director whilst disqualified

 The Company Directors Disqualification Act 1986 (HMSO, 1986) makes a
person who acts as a director whilst disqualified personally liable for the
company's debts.
 Directors of insolvent companies may be disqualified under the Act if the
court deems they are unfit to be involved in the management of a company.
 Phoenix companies
 Phoenix companies are created by directors of insolvent companies as a
method of continuing their business.
 Very often they have similar names as (or similar enough to suggest an
association with) the insolvent company.
 The Insolvency Act 1986 (HMSO, 1986) makes it a criminal offence where a
director creates such a company within five years of the original company
being liquidated.
 The person is liable to a fine or imprisonment.
 Fraud and deception
 The Insolvency Act 1986 makes it a criminal offence to conceal or fraudulently
remove company assets or debt – including falsifying records.
 It is also an offence to dispose of property that was acquired on credit that
has not been paid for.
 Defrauding creditors
 Once a winding up commences, the Insolvency Act 1986 makes it an offence
to make a gift of, or transfer, company property, unless it can be proved there
was no intent to defraud creditors.
 Misconduct during a liquidation
 A company officer may be liable for a number of offences due to their
misconduct.
 These include:

 Falsification of company books

 The destruction, mutilation, alteration or falsification of company books is an
offence under the Insolvency Act 1986.
 Omissions
 It is an offence under the Insolvency Act 1986 to omit material information
when making statements concerning a company's affairs.

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 Corporate fraudulent and criminal behaviour

 Companies Act 2006 offences

 The Companies Act 2006 (TSO, 2006) includes provision for a number of offences in
relation to the management and operation of a company.
 Company records
 Company records and registers, such as the register of members and record of
resolutions must be kept adequately for future reference.
 Officers in default are liable to a fine.
 Falsification of information, hiding falsification, or failing to prevent
falsification are also offences and the wrongdoer is liable to a fine.
 Accounting records
 Where a company fails to keep adequate accounting records, every officer
who defaults is subject to a fine. However, they have a defence if they acted
honestly and the circumstances surrounding the company's business makes
the default excusable.
 Trading disclosures
 Companies are required to disclose certain information (such as its name) in
specific locations. If these disclosures are not made then defaulting officers
are criminally liable for a fine and may also be liable for losses under the civil
law.
 Filing accounts
 If a company fails to file its accounts within the time limit following its year
end then any defaulting officer is liable to a fine.
 However, they will have a defence if they took reasonable steps to ensure the
requirements were complied with.
 False information
 Company officers are liable for making false disclosures in relation to the
directors' report, directors' remuneration report and summary financial
statements based on those reports.
 An officer is also liable for providing false or misleading information to an
auditor.
 Punishment is either imprisonment or a fine.

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 Corporate fraudulent and criminal behaviour

 The Fraud Act 2006

 The Fraud Act 2006 (TSO 2006), to which directors and secretaries are subject,
created a single offence of fraud, which a person can commit in three different ways
by:

 The Criminal Finances Act 2017

 The Criminal Finances Act 2017 (TSO 2017) potentially makes 'relevant bodies'
criminally liable if 'associated persons' are involved in tax evasion.
 A relevant body is defined by the Act as a company or partnership whether formed
in the UK or elsewhere.
 An associated person is anyone acting in the capacity of an employee, an agent, or
any other person who performs services on behalf of the relevant body.
 Under the Act, an offence will be committed by a relevant body if the following
three stages occur:

 Under the Act, a relevant body has a defence if it can demonstrate that it had
reasonable prevention procedures in place, or in the circumstances it was
unreasonable or unrealistic to have such procedures in place.
 It applies even if the business was not involved in the act or had no knowledge of it.
 The maximum penalty under the Act is a conviction and unlimited fine.

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