Corporate Criminal Behaviour

Question 1

Name a type of market abuse.

Answer 1

Insider dealing

Question 2

Why is market abuse harmful?

Answer 2

People have to believe that the market it fair and not rigged in favour of those ‘in the know’. They would leave the market and look for a cleaner market

Question 3

What legislation is insider dealing a crime under?

Answer 3

Criminal Justice Act 1993, s52-64

Question 4

How can insider dealing be hard to prove?

Answer 4

its hard to prove mens rea, the intention. This must be proved beyond reasonable doubt and that the accused knows the information is confidential and that it comes from an inside source. There also have to be 2 pieces of corroborative evidence to prove this, in Scotland.

Question 5

What are some defences for insider dealing?

Answer 5

1. where the individual is able to show that he did not, at the time, expect the dealing to result in a profit or in the avoidance of a loss
2. believed on reasonable grounds that the information had been disclosed widely enough to ensure that none of those taking part in the dealing would be prejudiced by now having the information
3. is able to show that he would have dealt with the securities in the same way or encouraged another to deal with the securities in the same way, even if he had not possessed the inside information

Question 6

What are the legal consequences for insider dealing?

Answer 6

1. unlimited fine
2. maximum ten years imprisonment

Question 7

What is market abuse?

Answer 7

Market abuse occurs when a person or group acts to disadvantage other investors in a qualifying market.

This is easier to prove at it is civil law, which only needs to prove balance of probability

Question 8

What is money laundering?

Answer 8

the process by which the proceeds of crime are converted into assets which appear to have a legal rather than an illegal source. The aim of disguising the source of the property is to allow the holder to enjoy it free from suspicion as to its source.

Question 9

What is the legislation for money laundering?

Answer 9

Money laundering is primarily regulated by the Proceeds of Crime Act 2002. The legislation imposes some important obligations upon professionals, such as accountants, auditors and legal advisers. These obligations require such professionals to report money laundering to the authorities and to have systems in place to train staff and keep records.

Question 10

What are the 3 phases of money laundering?

Answer 10

Placement - this is when the proceeds of illegal operations are first placed into the financial system, e.g. purchases of a fake product

Layering - the money is blended with ‘clean’ money and transferred from business to business

Integration - the money re-enters the legitimate system and has the appearance of coming from a legitimate source

Question 11

What criminal offences does the 2002 Act create?

Answer 11

1. laundering
2. failure to report
3. tipping off

Question 12

What are the legal penalties for laundering, failure to report and tipping off?

Answer 12

laundering - 14 years imprisonment

failure to report & tipping off - 5 years imprisonment and/or fine

Question 13

What is bribery?

Answer 13

an act of implying money or gift that alters the behaviour of the recipient

Question 14

Name some potential criminal activity that can take place during the winding up of companies.

Answer 14

1. failure to file accounts or annual returns
2. providing misleading information to an auditor
3. using a business name that requires prior approval without that approval
4. acting a contravention of a disqualification order

Question 15

What is fraudulent trading?

Answer 15

Occurs when a company’s business is carried on with intent to defraud creditors or for any fraudulent purposes

Civil liability if the business is in the course of winding up
Criminal liability if the business is not in the course of winding up

Question 16

William C Leith Bros (1932)
Establishing Dishonest Intent in Fraudulent Trading

Answer 16

it was said that if the directors carry on the business and cause the company to incur further debts at a time when they know that there is no reasonable prospect of those debts being paid this is a proper inference of dishonesty. The court also added that if the directors honestly believed the debts would eventually be paid there would be no intent to defraud.

Question 17

R v Grantham (1984)
Establishing Dishonest Intent in Fraudulent Trading

Answer 17

Facts: The directors ordered a consignment of potatoes on a month’s credit at a time when they knew that payment would not be forthcoming at the end of the month when it was due.

Held: The directors were convicted of fraudulent trading

Question 18

Maidstone Buildings (1971)
Person knowingly a party of fraudulent trading

Answer 18

it was established that a person is not ‘party’ merely by reason of knowledge. They must take some active step, such as the ordering of goods.

Question 19

What are the consequences of fraudulent trading?

Answer 19

1. court can order the individual to contribute to the company’s assets
2. if a director, may be disqualified for 15 years
3. if found criminally guilty then they can be fined and/or imprisoned for up to 10 years

Question 20

What is wrongful trading?

Answer 20

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

Question 21

Who can wrongful trading apply to?

Answer 21

Directors and shadow directors

Question 22

Produce Marketing Consortium Lts (No2) (1989)
Wrongful Trading

Answer 22

Facts: the company built up an overdraft and had continued trading loss with an excess of liabilities over assets. The directors recognised that liquidation was inevitable but carried on trading for another 8 months, arguing that the period of trading minimised the loss to creditors by allowing orderly disposal of the company’s goods.

Held: court required them to contribute £75,000 to the assets of the company (the debts incurred during the wrongful trading period) on the grounds that they would have know liquidation was inevitable