guidelines on resolution and prevention of corruption of thai listed companies in the stock exchange

1st National and International Conference on Administration and Management January 30, 2015, KU Home, Bangkok, THAILAND

Guidelines on Resolution and Prevention of Corruption of Thai Listed Companies in the Stock Exchange

Dr.Suraphol Srivithaya* and Dr.Rattaphong Sonsuphap**

Abstract

The research paper focuses on corruption problems in Thai private sectors of listed companies in the Stock Exchange of Thailand (SET) compared with those in five foreign stock exchanges: NYSE (USA), FWB (Germany), Milan stock market (Italy), KRK (South Korea) and SGX (Singapore). The comparative analysis concentrated on causes, nature, models and effects of corruption of listed companies, as well as law enforcement problems of Thai laws and foreign laws on corruption of listed companies in order to recommend effective guidelines on legal and other related measures for solving and preventing the corruption of Thai listed companies in the SET. The results of this research found that the private sectors’ corruption of listed companies in stock markets had more and more tremendous values and complex methods of corruption than those in the public sectors, whether such corruption were occurred in highly developed stock markets or in low developing ones, that had caused financial and economic crises at national, regional, and global levels without any frontiers in the world of globalization. The causes, nature, models, and effects of corruption, as well as problems of law enforcement, for solving and preventing listed companies’ corruption were different between listed companies in Thai and foreign stock markets. However, at least two models and methods of corruption that generated economic and financial crisis were in common: market manipulation by insider trading and embezzlement/siphoning of companies’ property by fraudulent accounting statement .

Keywords: Resolution and Prevention, Corruption of Thai Private Sectors, Listed Companies in Stock Exchange

* Associate Dean, Faculty of Law, Rangsit University; Email: [email protected] ** Associate Dean, College of Social Innovation, Rangsit University


[146]

Introduction

The corruption is a major crime that has considerable effects on political, economic and social conditions in various countries around the world. The United Nations classified corruption as one of eight serious global crimes: economic crimes, transnational crimes, terrorism, human trafficking, drug trafficking, corruption, computer crimes, and money laundry (United Nations Office on Drugs and Crime, 2004). The corruption of listed companies in the stock exchange has generated world economic and financial crisis: “1997 Tom Yam Kung crisis” in Thailand and “2008 Hamburger Subprime crisis” in the United States. (OECD, 2009 and 2010). As a result, the study on causes, nature, models and effects of listed companies’ corruption is the most urgent agenda for international financial reform in order to find out legal measures and other related measures for effective solving and preventing listed companies corruption.

Research Objectives

The objectives of this research aimed to analyze causes, nature, models and effects of Thai listed companies’ corruption in the stock exchange by comparative analysis with foreign case studies in five foreign stock markets: NYSE (USA), FWB (Germany), Milan stock market (Italy), KRK (South Korea) and SGX (Singapore) and to study related laws and enforcement problems of Thai and foreign laws against corruption in private sectors of listed companies, as well as to recommend appropriate and effective guidelines on legal measures and other related measures for solving and preventing the corruption of Thai listed companies in the Stock Exchange of Thailand.

Research Methodology

This research applied a Qualitative Research by Documentary Research and Case Studies Research by in-depth interview and focus group discussion with key informants, who are expertise of anti-corruption and compliance with corporate governance of listed companies in the stock markets, in order to collect deep data for comparative analysis of causes, nature, models, effects, and law enforcement of corruption of listed companies in Thai stock market in comparison with five foreign stock markets: NYSE in the USA, FWB in Germany, Milan stock market in Italy, KRK in South Korea, and SGX in Singapore, as well as to recommend guidelines for solving and preventing corruption of listed companies in the Stock Exchange of Thailand.


[147]

Data Collection and Analysis

The researcher has collected secondary data from all related documents, books, academic papers and articles printed in journals, research reports, especially United Nations Convention against Corruption, 2003 (United Nations Office on Drugs and Crime, 2004); Constitution of the Kingdom of Thailand, B.E. 2550 (Office of the Constitutional Court, 2013); Organic Act on Counter Corruption, B.E. 2542, B.E. 2550 and B.E. 2554 (Office of the National Counter Corruption Commission, 2012); Securities and Exchange Act, B.E. 2517, B.E. 2518, B.E. 2535 and B.E. 2551 (Office of the SEC, 2009). As for case study research, the primary data were collected by in-depth interview and focus group discussion from key informants, who are expertise and specialist in anti-corruption and compliance with corporate governance of listed companies in the stock markets, both in Thailand and foreign countries: Columbia University, New York in USA; Frankfurt, Münster and Düsseldorf in Germany; EU Commission in Brussels, Belgium; OECD Headquarters in Paris, France; as well as Singapore and South Korea in Asia. The researcher has undertaken content analysis and comparative analysis all primary and secondary data on causes, nature, models and effects of listed companies’ corruption in Thailand and foreign countries, as well as problems of law enforcement and other related measures in order to conclude and recommend effective measures for solving and preventing such corruption in the Stock Exchange of Thailand.

Research Results and Findings

The results of this research found that the corruption of listed companies in stock markets had more tremendous values and complex models of corruption than those in the government sectors, whether such corruption were occurred in highly developed stock markets or in low developing ones, that had caused financial and economic crises at national, regional, and global levels without any frontiers in the world of globalization. (OECD, 2009, 2010; Phongpaichit and Piriyarangsan, 1994). The causes, nature, models, and effects of corruption, as well as problems of law enforcement, for solving and preventing listed companies’ corruption were different between listed companies in Thai and foreign stock markets as follows (OECD, 2009, 2010; Alatas, 1990; Nikomborirak, 1999):

1) The causes of listed companies’ corruption in Thai and foreign stock markets are in general similar: the use of monopoly and discretion powers without accountability of high administrators in listed companies who had motivation and corruptive methods that facilitated their successful corruption opportunities, due to insufficient and ineffective control of management, financial and accounting, as well as weak and inefficient corporate governance and law enforcement (Klitgaard, 1988). However, the differences are corruption of Thai listed companies using more crony system and politician influence interfered in corruption than foreign listed companies. (Quah, 2011). The rules and regulation of the Stock


[148]

Exchange of Thailand are less developed and efficient than those of foreign stock markets, as well as inefficient internal and external control system and delayed law suites and enforcement in Thailand.

2) On corruption models of Thai and foreign listed companies, the research found that the nature of corruption is more complex in 4 models: (1) Defraud of corporate directors and managers, such as market manipulation, insider trading, embezzlement of property and corporate misstatement; (2) Fraud of corporate directors and managers, such as siphoning of company fund, conflict of interest and money game fraud; (3) Defraud of corporate finance and accounting, such as fraudulent statements, tax avoidance, and private bribery; (4) corruption by stock nominees, such as corruptive stock holdings by nominee and money laundering by nominee. The research found that almost of the four corruption models were done by Presidents, Corporate Directors, Chief Executive Officers (CEO) and Chief Financial Officers (CFO) by embezzlement of property and corporate misstatement and insider trading. The corruption of listed companies in Thailand were more and more complex, similar to those corruption of listed companies in the United States, European Union and Asian countries.

3) On the effects of listed companies’ corruption, the research found that such kinds of corruption had five essential effects: effects on the strength/confidence and development of the stock market, effects on the strength of private company sectors and confidence of investors, effects on the economic growth and national development, effects on the images and trusts of both Thai and foreign investors. Moreover, the research found that the corruption of Thai and foreign listed companies had not much difference in nature and serious levels of effects, if we compared the effects of Thai listed companies’ corruption in the medium sized Stock Exchange of Thailand that caused “Tom Yum Kung Crisis” in 1997 and those corruptions in the biggest and most developed NYSE that caused the “Subprime Hamburger Crisis” in 2008 by the bankruptcy of Lehman Brothers and the real estate crises in the United States (Milhaupt and Pistor, 2008).

4) On the law enforcement for corruption of listed companies, the research found that law enforcement for corruptions between Thai and foreign listed companies were very different. The law enforcement and law suits for corruption cases in Thai stock market had took longer than those in foreign stock markets because they had been done by various authorities such as Stock Exchange of Thailand Commission (SEC), Office of Attorney General, Department of Special Investigation (DSI), Bureau of Suppression of Economic Crimes, The Office of Counter Corruption Commission and the Anti -Money Laundering Office. Moreover, Thai law suits and enforcement concentrated on criminal punishment rather than civil cases, but foreign law suits enforced both criminal and civil cases, as well as more serious sanctions than Thai law suits and enforcement. The problems of Thai criminal law suits on corruptions of listed companies are difficulties of burdens of proves in criminal cases, prove difficulties of the will of shareholders, holding by stock nominees. As for civil cases, persons and groups of persons who committed unfair stock trading by insider trading technique are most difficult to be processed in law suits.

5) Corrective and preventive measures of listed companies’ corruption should be done according to Klitgaard theory (Klitgaard, 1988) by effective applying control measures of monopoly and discretion


[149]

powers of corporate president, directors and managers, as well as strict rules and regulation application and promotion of effective compliance in ethics and corporate governance by policy measures, legal measures and managerial measures as well as media and social measures.

Conclusion and Recommendation The corruption of listed companies in the stock markets has more complexity in its causes, models, methods and effects than that in the public sector. It can generate tremendous economic and financial crisis at national, regional and global levels such as “1997 Tom Yam Kung crisis” in Thailand and “2008 Hamburger Subprime crisis” in the United States. As a result, the research recommended legal and other related measures to solve and prevent corruption of listed companies in the Stock Exchange of Thailand as follows: 1. Legal Recommendation on Rule and Regulation

1.1 The Stock Exchange Commission’s power shall be increased for investigating criminal and civil cases. The criminal and civil punishment on corruption of listed companies cases in the stock market shall be increased as higher level as in some foreign stock markets in the United States and the European Union for more effective law enforcement.

1.2 The Securities and Exchange Acts, B.E. 2535 Securities and Exchange Act, B.E. 2517 (1974), B.E. 2518 (1975), B.E. 2535 (1992) and B.E. 2551 (2008) shall be amended to let the Stock Exchange Commission having a law enforcement power on punitive damages for corruption cases of listed companies in the Stock Exchange of Thailand.

1.3 All Securities and Exchanges legislation in Thailand shall allowed both criminal and civil process against corruption cases of listed companies in the Stock Exchange of Thailand the same as in the advanced stock markets in the United States and the European Union, as well as those in some Asian counties, such as South Korea, Hong Kong and Singapore.

1.4 All Thai authorities concerned shall accelerate to adopt all legal measures to allow any small shareholders and investors to suite a “class action process” against corruption cases of listed companies in the Stock Exchange of Thailand, which facilitate them at low cost for proceeding such cases.

1.5 All Thai authorities concerned shall accelerate to adopt whistleblower protection legislation and improve evidence protection legislation that was presently pushed by the Stock Exchange Commission.

1.6 The possibilities of legislative adoption on financial consumer protection for all shareholders and investors, who were seriously affected by corruption of listed companies in the Stock Exchange of Thailand, shall be studies in order to establish an financial consumer protection independent authority, such as “The Consumer Financial Protection Bureau”, established by Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 in the United States, and “The Financial Conduct Authority (FCA)”,


[150]

which was former Consumer Protection and Markets Authority (CPMA) in the United Kingdom, as well as BaFin in Germany, who exercised as an independent authority to supervise and control corruption in three financial sectors: banking, insurance and stock market.

1.7 The Stock Exchange Commission and the Stock Exchange of Thailand shall adopt severe punitive measures against any persons who practice “insider trading”, “fraudulent statements”, and disclosure of misstatement information, with the intention to fraud shareholders and investors in the SET.

1.8 The Stock Exchange Commission and the Stock Exchange of Thailand shall adopt severe punitive measures both criminal and civil suits against Chief Financial Officer (CFO) and others officers concerned, such as in the Korean stock exchange (KRK).

2. Recommendation on Policy and Administration

2.1 The Stock Exchange Commission (SEC) and the Stock Exchange of Thailand shall be restructured in order to increase its independent authorities against the risk of corrupted politicians with conflicts of interests to use political powers and influences to interfere in the nomination of S EC members.

2.2 The Stock Exchange of Thailand and the Stock Exchange Commission shall be developed by demutualization from independent state agency to be an independent public agency in order to launch an agenda of stock market and financial reform in the SET.

3. Recommendation for the Next Research

3.1 The next research shall be done on the reform of Thai capital market and stock market in order to increase SET’s potentials to solve and prevent any corruption in the private sectors of listed companies in the Stock Market of Thailand.

3.2 The next research shall be done in the topic of “Development Guidelines of Mechanism on Effective Law Enforcement for Resolution and Prevention of Listed Companies in the Stock Market”.

3.3 The next research shall be done on the utilization of accounting forensic science in the process of accounting evidence accumulation and proof for suiting corruption cases against listed companies in the Stock Exchange of Thailand.

3.4 The next research shall be done in the topic of “Guidelines for Joint Cooperation on Prevention and Suppression of Corruption in the Private Sectors of Listed Companies in the Stock Markets of ASEAN Economic Community (AEC) countries”.

Acknowledgement This research project was supported by the National Research Council of Thailand (NRCT) in 2012. The researchers also wish to thank the NRCT’s Legal Research Supporting Fund Committee and all of its personnel, who are very well coordinated and worked hard for successful completion of this research


[151]

project. The authors wish to express special thanks to the Research Institute of Rangsit University, who supported fund for registration fee of 1st National and International Conference on Administration and Management.

Reference

Alatas, S. 1990. Corruption: Its Nature, Causes and Functions. Vermont: Gower. Nikomborirak, D. 1999. Market and Corporate Governance in the New Environment: The Challenge

Facing Thai Companies. Bangkok: Thailand Development Research Institute. Klitgaard, R. 1988. Controlling Corruption. California: University of California Press. Milhaupt, C. and Pistor, K. 2008. Law and Capitalism: What Corporate Crisis Reveal about Legal Systems and

Economic Development around the World. Chicago: University of Chicago Press. OECD. 2009. OECD Strategic Response to the Financial and Economic Crisis : Contributions to the

Global Effort. Paris: OECD Publication. ________. 2009. The Corporate Governance Lessons from the Financial Crisis . Paris: OECD Publication. ________. 2009. Corporate Governance and the Financial Crisis: Key Finding and Main Messages. Paris:

OECD Publication. ________. 2010. Corporate Governance and the Financial Crisis: Conclusions and Emerging Good

Practices to Enhance Implementation of the Principles . Paris: OECD Publication. Office of the Constitutional Court. 2013. Constitution of the Kingdom of Thailand, B.E. 2550. Bangkok:

The Council of Ministers and Royal Gazette Publishing. Office of the National Counter Corruption Commission. 2012. Organic Act on Counter Corruption, B.E.

2542, B.E. 2550 and B.E. 2554. Nonthaburi: Office of NCCC. Office of the SEC. 2009. Securities and Exchange Act, B.E. 2517, B.E. 2518, B.E. 2535 and B.E. 2551.

Bangkok: Office of the SEC. Phongpaichit, P. and Piriyarangsan, S. 1994. Corruption and Democracy in Thailand. Bangkok: The Political

Economy Centre, Faculty of Economics. Chulalongkorn University. Quah, J. 2011. Curbing Corruption in Asian Countries: An Impossible Dream? Research in Public Policy Analysis

and Management, Volume 20. Howard House: Emerald Group Publishing Limited. United Nations Office on Drugs and Crime. 2004.United Nations Convention against Corruption. New

York: United Nations Publication.

guidelines on resolution and prevention of corruption of thai listed companies in the stock exchange

Documents