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 TeenDirector

Corporate Governance and Financial Reporting CentreNational University of Singapore

Singapore

The 2006 Asian Roundtable on Corporate GovernanceSession 1 – 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


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

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

If made honestly and with reasonable belief it was in the best interest of the company



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



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 Lower burden of proof No criminal sanctions for offenders



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



Case Study: CAO

Proposed Reforms

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 CEO and CFO most common Little action against directors, none against

independent directors



Case Study: CAO

Proposed Reforms

Criminal Actions

Wide range of offences Making false statements, falsifying

documents, insider trading, corruption, cheating

Few directors faced breach of duties offences



Case Study: CAO

Proposed Reforms

Criminal Actions

Punishment Jail of 18 weeks to 8 years Fines of $10,000 to $1.6 million

Time taken: From first sign of scandal to filing of

charges: 5 months to 19 months From filing of charges to conviction and

sentencing: 1 day to 10 months Most defendants pleaded guilty



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: Breaching continuous disclosure

requirement Market rigging to manipulate share price



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

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



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 In late 2003, bet oil price would fall Oil prices rose from US$35 to US$55 by

Nov 2004



Case Study: CAO

Proposed Reforms

Overview

General failure in corporate governance CEO and Head of Finance jailed 4

years 3 months and 2 years respectively and fined

Other directors fined for making false and misleading statement



Case Study: CAO

Proposed Reforms

Board of Directors

Chief Executive Officer

Risk Management Committee

Audit Committee

Internal Audit

Department Heads

Traders

Delegated Daily Risk

Management

Managed Internal Controls and Business Risk

Failed to detect losses

Received reports of

risk exposure

Risk Management Structure



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



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 A breach if suspected a problem and did

nothing



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



Case Study: CAO

Proposed Reforms

Q & A

Thank you!

implementation and enforcement of rules in singapore and the case of china aviation oil

Documents

legal cost

insider tradingchina

insider information

derivative action

commonlittle action

company documentssecurities

oil trading

futures acts199 bars