Welcome in the series notes of “Corporate and Business Law” ACCA F4 paper, In this article we will discuss about topic “Corporate and Fraudulent Behavior “.
Any activity which is intended to do fraud is said to be “Fraudulent Behavior“. Fraudulent Behavior is the proceeding or starting an action with dishonesty. We can say Fraudulent Behavior is intended to deceive for something.
Trading in a company
Here trading is not mean of buying or selling of goods or service but it means exchanging or buying companies shares.
When a company or a person within a company buy shares in bulk before final books or accounts for the purpose of increasing demand or share price value, this is known as “Insider Dealing“, It is a criminal offence as it is not an honesty activity with the stock market. People may be loss their trust from the stock market. It is a criminal offence under “Criminal Justice Act 1993” Part 5.
“Criminal Justice Act 1993” s52, a person will be liable or guilty of insider dealing if he has information as being an insider,
- They deal which cause changes in security price from that information
- Ask other person to deal with that information which can cause change in share price
- Disclose information outside from the organization
Dealing: two parties agree to exchange shares under s55
Inside Information: It is defined under s56
- Relates with particular security
- Not disclose publicly
- If that information effects on price of security
Insider: Under s57 defines a person inside of the company.
Insider such as:
- Director, Employees and shareholders.
- Not an employee ,director or a shareholder but a person has lot of information about the company.
- Direct or indirect information source for a outsider
Consequences of Inside Dealing
- If a person found guilty about inside dealing in a small offence (summary conviction) he may be imprisonment for 6 months.
- If a person found guilty about inside dealing in a big or serious offence (Indictment) he may be imprisonment for 7 years or fine unlimited.
- In the event that a director involves in inside dealing the he has to pay the profit which is made from the deal.
Under s118 it is defined as,
- Altering the share price or value
- Giving wrong information to regular users
- Give users information about market which is not available for generally
Seven types of behavior which cause market abuse.
1 Inside Dealing: Discuss above
2 Improper Disclosure: Disclose the inside information but not complete or proper
3 Misuse of Information: Information given to public which is generally not available, means a director spread a news that a company’s share price is going to be too low then the customers will sell their shares and director will buy share from those customers. And suddenly share price increases instead of decreasing.
4 Manipulating Transactions: It means placing order for share transaction in a large amount which misleads the customers to think that there maybe something wrong in the company or buyers will think that the company is maybe going to close or something else.
5 Manipulating Devices: Placing orders with devices which are not real or they are fake.
6 Dissemination: A person know that the information about investment or impressions are wrong or misleading but he conveys it to the customers.
7 Distortion or Misleading Behavior: The false or misleading impressions or behavior for supply, demand or about an investment.
It is the process of making money legal from illegal means changing black money into white money. In other or simple words “black money” is the money about which state or a government does not have any kind of knowledge.
It is regulated by the proceed of Crime Act 2002.
Auditors, Accountants and legal advisers are liable to inform the government if the company involves in money laundering.
Money Laundering phases
Placement: Buy legal property from “Black Money“
Layering: Transfer the “Black Money” from different sources so no one can knows from where it is generated.
Integration: Re-invest “Black Money” and show legal money.
Note: Convert “Black Money” into white money by following these three step.
Money Laundering phases
Laundering: Hide the initial source of money means change the location, Ownership, nature and source of a property.
Any property which you get by a criminal activity or conduct is refer as “Criminal Property“.
Failure to Report: Unable to disclose the information or knowledge for a property, usually done by a single or an individual under the s330, Proceeds of Criminal Act 2002.
If a person know about money laundering and not disclose the information such as auditor hide the actual audit report.
Tipping Off: A person already inform owners that he has disclose the information to “National Criminal Agency” and now care for your money and matters related to money laundering, This is also an offence under s333, Proceeds of Criminal Act 2002.
Penalties of Money Laundering
- For “Money Laundering” Offence 14 years imprisonment under s327, Proceeds of Criminal Act 2002.
- For “Failure to Report” or “Tipping Off” conviction offence 5 years maximum imprisonment or fine.
Giving money or gift to government officials for doing illegal work.
Four offence or bribery
- Giving money to an official for doing improper work (Under s1, Bribery Act 2010 but came in force in 2011)
- Requesting, accepting money for doing work improperly ((Under s2, Bribery Act 2010)
- Gaining business or project advantages or benefits by influencing foreign officials (Under s6, Bribery Act 2010)
- Decreasing liability for income tax (or other reasons) by giving bribe (Company to company or business to business),( (Under s7, Bribery Act 2010)
Penalties for Bribery Offence
- 10 years imprisonment incase of an individual
- Unlimited find in case of an organization
Deferred Prosecution Agreement (DPA)
If an organization done wrong then they can make an agreement between prosecution and a commercial organization and states that “we will pay and promise to not involve in any offence”. Prosecution will agree if these conditions are filled,
- Paying financial penalties
- Or promise for not involving in other or such offence again
Criminal activity in Operations, Management And Companies Winding up
Failure to file account and returns (Annually)
Unable to submit the annual accounts or return to relevant authorities, it is a a criminal offence and can cause 5000 pounds as a fine on directors.
Misleading Information to Auditor
An auditor need exact and true information for his better performance from the company and its employee (under s499, Companies Act 2002).
Officer criminal offence
- Provide misleading information
- Or unable to provide required explanation by an auditor
An individual can defend by explaining that the information which he can not give auditor because he was not responsible for it or he has not authority for giving that information.
Company Director Disqualification Act 1986 (CDDA 1986)
If a person is not a director but play role as a director or he is discharged already because of bankruptcy then he is liable for penalty up to 2 years in indictment for 6 months in summery conviction. (both are explain above in Consequences of Inside Dealing).
Disqualified Management is liable to pay the debts in which he acted (under s15, CDDA 1986).
Any person who was a director and buy that company before 12 months of liquidation of the company (The company is said to be “Phoenix Company“) Under s216 and 217, Insolvency Act 1986.
If a director take debts from the people and use that fund in different company but name is very similar then he is personally liable for paying that debts.
The Theft Act 1978
This law was based on,
- Obtaining property by cheating or deception
- Obtain transfer money by cheating
- Taking money advantage by cheating
The Fraud Act 2006
The Fraud Act 2006 swept the old laws and defines fraud as,
- Defendant must dishonest or have intension to make loss for others
- Do fraud by making misleading information (Under s3)
- Fraud by disclose incomplete information to a person, and that person is not able to disclose the exact information to any third party
- Fraud by misuse of personal power or position
Undervalue and preference
Undervalue: Value of an asset decrease or reduce by the original value at the time of liquidation.
preference: It is a kind of fraud example, there is a director who has to pay $5000 each creditors (5 creditors) one of them was his cousin, the directors has only $10000 to pay them all now the director first pay his cousin with full amount $5000 and remaining $5000 distribute among them 4 creditors.
Take place for the purpose or intension of doing fraud to customers or creditors. It is both civil and criminal case.
When directors knows that the company is going for liquidation and they will not be able to pay its creditors after sometimes but still they operate and do so many transaction.
Consequences of wrongful trading
- The liquidator can appeal in the court for paying contribution from the directors
- Directors may disqualified for 15 years under CDDA 1986.
Hopefully you like the topic “Corporate and Fraudulent Behavior”. Must read it with proper concentration because “Corporate and Fraudulent Behavior” topic is little complicated because there is lots of sections which you have to learn for passing “Corporate and Business Law” ACCA F4 paper.
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